Contract For Difference

Contract For Difference

What is Contract For Difference (CFD)?

What's the main benefit of using CFD?

Could you please provide brief note / user guide on Contract For Difference?

I would like to know a lot more details on Contract For Difference, where else can I find it?

I understand that there is an interest component on CFD, how do I go about calculating the interest?

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What is contract for difference (CFD)? 

Contract for Difference is the agreement between two parties to enter into the contract in which both parties mutually agreed to settle the difference in value between the opening and closing price of the underlying instrument.

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What's the main benefit of using CFD? 

The main benefit of using Contract for Difference (CFD) is that it allow the user to short the market, i.e. if you are of the view that the overall market or a particular counter is coming down, and would like to sell first before buying, CFD is the right instrument for you to carry out such a trade.

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Could you please provide brief note / user guide on Contract For Difference? 

Certainly, you could download a two pages Brief Note / User Guide on CFD by using this download link: CFD Brief Notes / Guidelines.  

How to download

Internet Explorer:   If you are using internet explorer, right click on the link and choose 'Save Target As', then select a folder of your choice to download the document.

Mozilla Firefox:   If you are using Firefox, right click on the link and choose 'Save Link As' to download to a folder of your choice.   

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Details Of Contact For Difference 

To find out more about CFD, you could go to Lim&Tan website http://www.limtan.com.sg/ , click on "Products" tab, then choose Contract for Difference. On the same page, also click on FAQ for further information.

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I understand that there is an interest component on CFD, how do I go about calculating the interest? 

Calculation for the interest rate will be based on the principal amount x interest (%) x (number of calender days/365):

For example, a SGD 10,000 long position that is held for 16 calendar days (less 4 days, see explanation below) = 12 calendar days, at an intesest rate of 6.5%, the interest incurred will be calculated as:

10,000 x 6.5% x 12/365 = SGD21.37

Conversely, a SGD 10,000 short position that is held for 16 calendar days (less 4 days, see explanation below) = 12 calendar days, at an intesest rate of 4%, the interest incurred will be calculated as:

10,000 x 4% x 12/365 = SGD13.15

* Notes:

1. The above has yet to include transaction cost at the initiation and closing of position, which is at about 0.22% (as of Jul 2010) each way.

2. As a matter of fact, after the initiation of a CFD position, there's a interest free period of T+3 (trade day plus 3 days, total 4 days) market days, hence, in the above example, a 16 calendar days holding period is effectively 12 calendar days.

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