Forex CFD: an example
Suppose you buy 1,000 CFDs on the EURUSD currency pair at the price of 1 euro each. The required margin is € 150, assuming a margin ratio of 15.0%. We also assume that we sell this CFD stock after 20 days at the price of 1.1 euros. Consequently, the gross profit generated by this transaction is equal to (1.1-1.0) x 1000 = 100 euros.
From this amount we have to subtract the so-called “margin interest expense” which, assuming a Euribor rate of 3.5% and a spread of 2.0%, are equal to (1000 x 7.0% x 20 days / 365 days) = 3,835 euros. These must be subtracted from the gross profit to obtain the net profit, equal to 96.16 euros.
It is also good to specify that, for simplicity of calculation, commissions paid to the intermediary have not been hypothesized, which instead always happens in reality and which must therefore be taken into account. It is therefore good to ask your intermediary for the conditions and commissions applied, to proceed with a precise calculation.
One of the many advantages of trading through CFDs is that of being able to undertake different trading strategies. One of these is the famous “pairs trading” (or “spread trading”) which consists in the simultaneous trading of two CFDs, one ‘long’ and one ‘short’, on different underlying assets. Another highly practiced strategy is the “directional” one, which bets on the rise of a strong currency or on the fall of a weak one. Other strategies practiced are those of arbitrage, mismatching, directional long – short, “market neutral” and the creation of neutral currency portfolios, using the beta index and the study of the correlations among currencies.