Risk Components of Equity CFDs Versus Shares

Summary

The document distinguishes the market exposure of an equity CFD from the additional risks created by the contract structure. It argues that, for the same underlying equity, market risk should be similar, while leveraged CFD trading adds liquidation risk and OTC dealing adds counterparty risk. Corporate actions such as dividends can also affect how the CFD behaves relative to directly holding the share.

The comparison is conceptual rather than quantitative: it gives no risk model, calculation, or empirical evidence, and points readers elsewhere for fuller explanations. It also characterizes CFDs as similar in function to futures, while noting their OTC trading and smaller contract sizes. That analogy is only a broad framing; contract terms, financing, collateral, and dividend adjustments can vary, so the document does not establish that CFDs and futures have identical risks.

Key ideas

• The underlying equity exposure of a CFD can have market risk similar to owning the corresponding share.
• Leverage creates liquidation risk that an unlevered shareholding does not have.
• OTC CFD trading introduces counterparty risk.
• Corporate actions, including dividends, can create differences between CFD and share returns.
• The futures comparison is presented as a general analogy, not a full risk equivalence.

Tags

# How to model the risk of a CFD


# How to model the risk of a CFD












I'm struggling to understand why the risk on an equity CFD is not the same as for the corresponding equity. The RiskMetrics FAQ mentions two ways to model a CFD, but it does not explain why this is necessary. A good explanation would be appreciated.

## Answer by Tal Fishman (score 2)

https://quant.stackexchange.com/a/1519

Can you point to a source saying that the risks really are different? See the risk section of the wikipedia page. The market risk of an equity CFD and the corresponding equity should be the same. A CFD trader also faces additional liquidation (leverage) risk and counterparty risk, which an ordinary unlevered equity trader does not. There are also a few other differences in risk due to corporate actions (dividends). Once again, the wikipedia page explains everything here.

My impression is that CFDs are functionally equivalent to futures, except that they are traded OTC and have smaller contract sizes.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.