Are you an EPFL student looking for a semester project?
Work with us on data science and visualisation projects, and deploy your project as an app on top of Graph Search.
Concept
Contract for difference
Summary
In finance, a contract for difference (CFD) is a legally binding agreement that creates, defines, and governs mutual rights and obligations between two parties, typically described as "buyer" and "seller", stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time. If the closing trade price is higher than the opening price, then the seller will pay the buyer the difference, and that will be the buyer's profit. The opposite is also true. That is, if the current asset price is lower at the exit price than the value at the contract's opening, then the seller, rather than the buyer, will benefit from the difference.
Developed in Britain in 1974 as a way to leverage gold, CFDs have been trading widely since the early 1990s. CFDs were originally developed as a type of equity swap that was traded on margin. The invention of the CFD is widely credited to Brian Keelan and Jon Wood, both of UBS Warburg, on their Trafalgar House deal in the early 1990s.
Transmission congestion#Transmission rights
CFDs are different from financial transmission right (FTR) in two ways. First, a CFD is usually defined at a specific location, not between a pair of locations. Thus, CFDs are a tool principally for hedging temporal price risk – the variation in the nodal pricing or locational marginal pricing (LMP) over time at a specific location. Second, CFDs are not traded through regional transmission organizations (RTOs) markets. They are bilateral contracts between individual market participants.
CFDs were initially used by hedge funds and institutional traders to cost-effectively gain an exposure to stocks on the London Stock Exchange (LSE), partly because they required only a small margin but also, since no physical shares changed hands, they also avoided stamp duty in the United Kingdom.
It remains common for hedge funds and other asset managers to use CFDs as an alternative to physical holdings (or physical short selling) for UK listed equities, with similar risk and leverage profiles.
Official source
About this result
This page is automatically generated and may contain information that is not correct, complete, up-to-date, or relevant to your search query. The same applies to every other page on this website. Please make sure to verify the information with EPFL's official sources.
Related courses (6)
FIN-405: Investments
The course covers a wide range of topics in investment analysis
FIN-413: Financial applications of blockchains and distributed ledgers
This course provides an introduction to Distributed Ledger Technology (DLT), blockchains and cryptocurrencies, and their applications in finance and banking and draws the analogies between Traditional
FIN-404: Derivatives
The objective of this course is to provide a detailed coverage of the standard models for the valuation and hedging of derivatives products such as European options, American options, forward contract
Related lectures (25)
Power System Dynamics: Exercise on Market Mechanisms
Focuses on practical exercises related to market mechanisms in power systems.
Factor Models in Finance
Explores factor models in finance, covering mean-variance portfolios, size and value anomalies, and momentum strategies.
Portfolio Theory: Risk Parity Strategy
Explores Portfolio Theory with a focus on the Risk Parity Strategy, discussing asset allocation proportional to the inverse of volatility and comparing different diversified portfolios.
Related publications (15)
Informational frictions in financial markets
This thesis consists of three chapters on informational frictions in financial markets. The chapters analyze problems related to markets' ability to guide real investment, and what drives liquidity. Both problems are important to ensure efficient resource ...
EPFL2021Signaling in OTC Markets: Benefits and Costs of Transparency
We provide a theoretical rationale for dealer objections to ex post transparency in over-the-counter markets. Disclosure of the terms of a transaction conveys information possessed by the dealer about the asset quality and reduces the dealer's rents when s ...
CAMBRIDGE UNIV PRESS2020Trading mechanisms in over-the-counter markets
In the chapter ``When to Introduce Electronic Trading Platforms in Over-the-Counter Markets?'' An equilibrium in a market is determined in which traders have the choice between using an electronic platform with a request-for-quote protocol or calling a dea ...
EPFL2020Related people (1)
Related concepts (3)
Foreign exchange market
The foreign exchange market (forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the credit market. The main participants in this market are the larger international banks.
Futures contract
In finance, a futures contract (sometimes called futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price. The specified time in the future when delivery and payment occur is known as the delivery date.
Hedge (finance)
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.