Q. How do you work out CFD Interest Swaps with an example?

Nov 29, 2022

Q. How do you work out CFD Interest Swaps with an example?

Answer: CFDs is an instrument where you pay a small amount of money to be exposed to the full value of the share.

With CFDs, there are daily charges when you buy and daily income interest that you receive when you sell (go short).

The charge is known as a ‘daily swap’ or ‘daily interest charge’.

You can ask your broker what the annual interest swap rate is or you’ll most likely be able to find it on your platform…

With my broker for example, the long swap (for when you buy) is -9.47% per year.
And the short swap (for when you sell) is 2.71%.

With your Shoprite trade, because you’re buying CFDs (which is a geared instrument), you’re essentially borrowing the money from the bank.
This means, you have to pay interest on the borrowed funds (in order to be exposed to the full value).

Those are the ‘swaps’ we’re talking about.

Let’s say the Shoprite share is trading at R223.19 and the margin (initial deposit) to buy 1 CFD is 9.7% (R21.70).

This means, when you buy 1 CFD for R21.70, you’ll be exposed to the full R223.19 worth of the share.

If you buy 100 CFDs and pay R2,170 (100 CFDs X R21.70) you’ll be exposed to the full R22,319 worth of shares (100 shares X 223.19).

And if you sold the 100 CFDs at R236.00, you would have been exposed to R23,600.

On that R22,319 exposure, you’ll pay 9.47% (R2,113.60) interest (swap) per year.

But luckily as traders, you don’t need to worry about paying the full amount, as we like to hold only for a short period of time.

This means, each day you hold the CFD with exposure of R22,319 – you’ll only pay R5.49.

(Exposure of your trade X 9.47%) ÷ 365 days.

If the exposure never changed and you held onto your trade at the same share price you would pay R54.90 (after 10 days).

However, we know that share prices move up and down each day.

The higher the market goes up, the higher your exposure where you’ll pay slightly more.

If the market price drops, you will pay slightly less.

However, as traders we don’t tend to hold for more than a couple of days or weeks to curb the daily interest charges.
If you have any other questions please ask in the comments :)
Trade well, live free.
Timon
MATI Trader