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Examples of contracts for differences (CFD)

Example 1

A company has borrowed â‚�10m for two years. It hedges the loan by entering into a euro/ sterling currency swap with a bank for the same amount and the same period. If the company does nothing to hedge the borrowing, it risks making a loss if the value of the â‚�10m, measured in sterling terms, increases because it would then cost more to repay the loan. »Ê¹ÚÌåÓýapp purpose of the swap is to remove that risk of loss. It comes within the definition of a CFD.

Example 2

A company buys a call option over the FTSE 100 index. If, at the exercise date, the FTSE 100 is above a specified level (the strike price), the company will exercise the option and receive a cash sum calculated by reference to the difference between the actual level of the FTSE 100 index and the strike price. This is a CFD - fluctuation in the level of the FTSE 100 index can potentially result in a profit for the company. (»Ê¹ÚÌåÓýappre is no possibility of property being delivered under the contract, so the provisions of CTA09/S580(2) mean that it will not be classed as an option for the purposes of Part 7 CTA09 - see CFM50340.)

Although companies will most frequently use a CFD as a hedge (as in example 1), a contract that is held speculatively (as in example 2), or as trading stock, will also fall within the definition.