CG56101 - Futures: financial futures: contracts for differences: example
In both examples below, the shares in ABC Plc stand at 拢5 per share at commencement.
Example 1
An investor expects the shares to rise, and enters into a long position over 20,000 shares. He puts up a deposit of 拢20,000 (20% of the full value of 拢100,000). The broker who is counter-party to the deal debits the investor鈥檚 account with 鈥渋nterest鈥� on the unpaid balance of 拢80,000 at 0.75% per calendar month (拢600 per month). After two months, the company pays a dividend of 2p per share, and the broker credits the account with 拢400 (equivalent to the dividend on 20,000 shares).
After three months the shares stand at 拢6.50 per share, and the investor closes out the contract. The increase in value of 20,000 shares over the life of the contract is 拢30,000, and this is credited to the investor鈥檚 account. The broker also charges commission of 拢500.
In summary, the account is as follows:
| Description | Amount |
|---|---|
| Deposit | 拢20,000 |
| Less 鈥渋nterest鈥� - 3 months @ 拢600 pm | 拢 1,800 |
| - | 拢18,200 |
| Plus 鈥渄ividend鈥� | 拢 400 |
| - | 拢18,600 |
| Plus increase in value of shares | 拢30,000 |
| - | 拢48,600 |
| Less commission | 拢 500 |
| Final balance | 拢48,100 |
The chargeable gain is 拢28,100, the difference between the amount deposited and the closing balance. This can be expressed as:
| Description | Deduction | Amount |
|---|---|---|
| Increase in value of 20,000 shares | - | 拢30,000 |
| Plus 鈥渄ividend鈥� equivalent | - | 拢 400 |
| - | - | 拢30,400 |
| Less 鈥渋nterest鈥� charges | 拢1,800 | - |
| Commission | 拢 500 | 拢 2,300 |
| Net gain | - | 拢28,100 |
If the shares had decreased in value to 拢4.50, the decrease in value of 20,000 shares (拢10,000) would be debited from the account.
At close, the account would then be:
| Description | Amount |
|---|---|
| Opening deposit | 拢20,000 |
| Less 鈥渋nterest鈥� as above | 拢 1,800 |
| - | 拢18,200 |
| Plus 鈥渄ividend鈥� | 拢 400 |
| - | 拢18,600 |
| Less decrease in share price | 拢10,000 |
| - | 拢 8,600 |
| Less commission | 拢 500 |
| Closing balance | 拢 8,100 |
The allowable loss is 拢11,900, the difference between the amount deposited and the closing balance. This can be reconciled:
| Description | Amount |
|---|---|
| Decrease in price of 20,000 shares | 拢10,000 |
| Plus 鈥渋nterest鈥� charges | 拢 1,800 |
| Commission | 拢 500 |
| - | 拢12,300 |
| Less 鈥渄ividend鈥� | 拢 400 |
| Net loss | 拢11,900 |
Example 2
The investor expects the shares to fall. He enters into a short position over 20,000 shares. Once again, he deposits 拢20,000, 20% of the value of 20,000 shares. The broker credits 鈥渋nterest鈥� of 拢450 per month (based on an interest rate of 0.5625% per calendar month), and debits an amount equivalent to a dividend of 2p per shares paid on 20,000 shares.
After three months, the investor closes out the contract when the share price is 拢3.75 per share. His account is credited with the reduction in price of 20,000 shares (拢25,000).
The summarised account is:
| Description | Amount |
|---|---|
| Opening balance | 拢20,000 |
| Plus 鈥渋nterest鈥� for three months | 拢 1,350 |
| - | 拢21,350 |
| Less 鈥渄ividend鈥� | 拢 400 |
| - | 拢20,950 |
| Less commission | 拢 500 |
| - | 拢20,450 |
| Plus reduction in share price | 拢25,000 |
| Closing balance | 拢45,450 |
The investor has a chargeable gain of 拢25,450, the difference between the amount deposited and the closing balance. This can be reconciled:
| Description | Deduction | Amount |
|---|---|---|
| Decrease in share price | - | 拢25,000 |
| Plus 鈥渋nterest鈥� credits | - | 拢 1,350 |
| Net gain | - | 拢26,350 |
| Less 鈥渄ividend鈥� | 拢400 | - |
| Commission | 拢500 | 拢 900 |
| - | - | 拢25,450 |
If the investor was wrong, and the shares in fact increased in value to 拢5.75 per shares between the opening and closing of the contract, the account would be:
| Description | Deduction | Amount |
|---|---|---|
| Opening balance | - | 拢20,000 |
| Plus 鈥渋nterest鈥� credits | - | 拢 1,350 |
| - | - | 拢21,350 |
| Less 鈥渄ividend鈥� charge | 拢 400 | - |
| Commission | 拢 500 | - |
| increase in value of 20,000 shares | 拢15,000 | 拢15,900 |
| Closing balance | - | 拢 5,450 |
The investor has an allowable loss of 拢14,550, the difference between the amount deposited and the closing balance. This can be reconciled as
| Description | Amount |
|---|---|
| increase in value of the shares | 拢15,000 |
| less 鈥渋nterest鈥� credits | 拢 1,350 |
| - | 拢13,650 |
| plus 鈥渄ividend鈥� charge | 拢 400 |
| commission | 拢 500 |
| - | 拢14,550 |