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Listed CFDs: high precision trading tools with 1 for 1 movement and leverage
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Listed Contracts for Difference (LCFDs) combine the flexibility of the unlisted version of CFD contract with the price transparency of a London Stock Exchange listing and strictly limited risk.
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LCFDs offer the same benefits of high gearing as warrants. In order to gain exposure to a given underlying index or stock, an investor is only required to put up a margin (typically between 5% and 15%) for the amount they wish to control.
LCFDs feature the additional benefit of prices moving on a one for one basis with the underlying index or stock. Investors can therefore follow the value of their investment easily with reference to the value of the underlying instrument. With long LCFDs, investors can benefit from a bull market, while short LCFDs enable investors to play the bear market or hedge their physical exposure to a stock or index.
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| Bullish example on British Telecom share |
With the British Telecom share currently trading at 240p, you forecast a rise in the share’s price and you wish to take a leveraged bullish position. To do so you purchase a LCFD with the following characteristics:
| Expiry |
3 months |
| Stop loss |
230p |
| Guaranteed stop loss |
220p |
| Dividend for BT share |
7p |
| Ex-dividend date |
2 months out |
| Finance fee |
Libor +2.5% p.a.* |
*charged on the guaranteed stop loss amount, pro-rata'd to expiry of LCFD
The holder of a long LCFD does not directly receive a dividend, but receives the economic benefi t (i.e. 7p) as the LCFD price is discounted by the dividend amount that is due to be paid before the product expires.
The price of long LCFD is determined as follows:
Price = Intrinsic Value (being Share Price - Guaranteed Stop Loss) + Fees - Dividend
Price = 240p - 220p + 4p - 7p = 17p
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Scenario 1: A rise in BT share’s price
By end of day, the British Telecom share’s price moves up by 10p, from 240p to 250p. The price of the listed CFD would also increase by 10p, from 17p to 27p.
The upside on a long LCFD is unlimited.
Scenario 2: A fall in BT share’s price
During the day, the British Telecom share’s price breaches the 230p level, triggering a stop-loss event.
Assume now that over the next 30 minutes, the share price records a low of 229p.
The product will now expire, with all financing fees forfeited. The redemption value is determined with reference to the lowest share price in the 30 minutes after the stop loss event is triggered. We assume that over the next 30 minutes, the share price records a
low of 229p.
As the stop loss event happened before the ex-dividend date, the holder needs to pay back the dividend amount by which the LCFD price was previously discounted, hence the price of the listed CFD is now:
Price = Intrinsic value (being lowest Share Price recorded in 30 minutes after the stop loss event is triggered – Guaranteed Stop Loss) – Dividend
Price = 229p – 220p – 7p = 2p
Investors receive 2p per LCFD held.
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| Bearish example on British Telecom share |
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With the British Telecom share currently trading at 240p, you forecast a drop in the share’s price and you wish to take a leveraged short view on BT’s stock. To do so you purchase a LCFD with the following characteristics:
| Expiry |
3 months |
| Stop loss |
270p |
| Guaranteed stop loss |
280p |
| Dividend for BT share |
7p |
| Ex-dividend date |
2 months out |
| Finance fee |
0%* |
*There is no financing fee on short LCFDs
The holder of a short LCFD does not directly pay the dividend, but pays the economic cost (i.e. 7p) as the LCFD price is increased by the dividend amount.
Price of short LCFD is:
Price = Intrinsic Value (being Guaranteed Stop Loss - Share Price) + Dividend
Price = 280p - 240p + 7p = 47p
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Scenario 1: A drop in BT share’s price
By end of day, the British Telecom share’s price moves down by 10p, from 240p to 230p. The price of the listed CFD would wherefore increase by 10p, from 47p to 57p. The maximum payout for a short listed CFD would occur if the share price fell to zero. In this case, the maximum payout would be 280p.
Scenario 2: A rise in BT share’s price
During the day, the British Telecom share’s price breaches the 270p level, triggering a stop-loss event.
The product will now expire. The redemption value is determined with reference to the highest share’s price in the 30 minutes after the stop level is triggered. Assume that over the next 30 minutes, the share price records a high of 272p.
As the stop loss event happened before the ex-dividend date, the holder will receive the dividend amount that was previously paid up-front.The price of the LCFD is now:
Price = Intrinsic value (being Guaranteed Stop Loss - Highest Share Price recorded in 30 minutes after the stop level is triggered) + Dividend
Price = 280p – 272p + 7p = 15p
Investors receive 15p per LCFD held.
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