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HMRC internal manual

# Futures: financial futures: contracts for differences: example

In both examples below, the shares in ABC Plc stand at £5 per share at commencement.

## Example 1

An investor expects the shares to rise, and enters into a long position over 20,000 shares. He puts up a deposit of £20,000 (20% of the full value of £100,000). The broker who is counter-party to the deal debits the investor’s account with “interest” on the unpaid balance of £80,000 at 0.75% per calendar month (£600 per month). After two months, the company pays a dividend of 2p per share, and the broker credits the account with £400 (equivalent to the dividend on 20,000 shares).

After three months the shares stand at £6.50 per share, and the investor closes out the contract. The increase in value of 20,000 shares over the life of the contract is £30,000, and this is credited to the investor’s account. The broker also charges commission of £500.

In summary, the account is as follows:

 Deposit £20,000 Less “interest” - 3 months @ £600 pm £ 1,800 £18,200 Plus “dividend” £ 400 £18,600 Plus increase in value of shares £30,000 £48,600 Less commission £ 500 Final balance £48,100

The chargeable gain is £28,100, the difference between the amount deposited and the closing balance. This can be expressed as:

 Increase in value of 20,000 shares £30,000 Plus “dividend” equivalent £ 400 £30,400 Less “interest” charges £1,800 Commission £ 500 £ 2,300 Net gain £28,100

If the shares had decreased in value to £4.50, the decrease in value of 20,000 shares (£10,000) would be debited from the account.

At close, the account would then be:

 Opening deposit £20,000 Less “interest” as above £ 1,800 £18,200 Plus “dividend” £ 400 £18,600 Less decrease in share price £10,000 £ 8,600 Less commission £ 500 Closing balance £ 8,100

The allowable loss is £11,900, the difference between the amount deposited and the closing balance. This can be reconciled:

 Decrease in price of 20,000 shares £10,000 Plus “interest” charges £ 1,800 Commission £ 500 £12,300 Less “dividend” £ 400 Net loss £11,900

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## Example 2

The investor expects the shares to fall. He enters into a short position over 20,000 shares. Once again, he deposits £20,000, 20% of the value of 20,000 shares. The broker credits “interest” of £450 per month (based on an interest rate of 0.5625% per calendar month), and debits an amount equivalent to a dividend of 2p per shares paid on 20,000 shares.

After three months, the investor closes out the contract when the share price is £3.75 per share. His account is credited with the reduction in price of 20,000 shares (£25,000).

The summarised account is:

 Opening balance £20,000 Plus “interest” for three months £ 1,350 £21,350 Less “dividend” £ 400 £20,950 Less commission £ 500 £20,450 Plus reduction in share price £25,000 Closing balance £45,450

The investor has a chargeable gain of £25,450, the difference between the amount deposited and the closing balance. This can be reconciled:

 Decrease in share price £25,000 Plus “interest” credits £ 1,350 Net gain £26,350 Less “dividend” £400 Commission £500 £ 900 £25,450

If the investor was wrong, and the shares in fact increased in value to £5.75 per shares between the opening and closing of the contract, the account would be:

 Opening balance £20,000 Plus “interest” credits £ 1,350 £21,350 Less “dividend” charge £ 400 Commission £ 500 increase in value of 20,000 shares £15,000 £15,900 Closing balance £ 5,450

The investor has an allowable loss of £14,550, the difference between the amount deposited and the closing balance. This can be reconciled as

 increase in value of the shares £15,000 less “interest” credits £ 1,350 £13,650 plus “dividend” charge £ 400 commission £ 500 £14,550