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CFDs, forwards, futures and the cost-of-carry

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  • Douglas Foster, F.
  • Lee, Adrian D.
  • Liu, Wai-Man

Abstract

We show that contracts for difference (CFDs) may be viable substitutes for forward contracts and may have some features that are preferable to futures contracts. We develop parity relations between CFDs, forwards, and futures contracts using simple cost-of-carry arguments. We use these parity relations to consider whether exchange listed stock index CFDs might be viable substitutes for exchange listed futures contracts. Using the S&P/ASX 200 stock index we find that listed CFDs (ignoring an open interest charge) generate cash flows similar to listed futures contracts. Our analysis considers stochastic interest rates and uncertain dividend payments by the shares in the index.

Suggested Citation

  • Douglas Foster, F. & Lee, Adrian D. & Liu, Wai-Man, 2019. "CFDs, forwards, futures and the cost-of-carry," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 183-198.
    • Handle: RePEc:eee:pacfin:v:54:y:2019:i:c:p:183-198
    DOI: 10.1016/j.pacfin.2018.05.004
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    References listed on IDEAS

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    More about this item

    Keywords

    CFDs; Contracts for difference; Cost-of-carry; Forward contracts; Futures contracts;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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