In the Contract for Difference market, you sometimes notice that the contracts are described as relating to cash or rolling futures. So what's the difference and does it matter what you do?
Every contract for difference is based on an underlying market. The usual assumption would be that it is based on the cash price, so if you want to buy something today for delivery today, the current price will prevail. Based on that, it is a "Cash CFD" and something that would normally be seen with every currency pair.
However, a number of assets are more often priced on the futures market and oil is a good example of this. A whole series of variables play a role here, from the quality or quality of the oil to the location of delivery, but there is also a date on which the goods are delivered and the financial obligations are settled between buyer and seller – that is the point at whose contract expires. Contract expiration dates are defined by the exchange that the underlying market offers, with the next (West Texas Intermediate) contract, or the May 2019 contract, which expires on April 18, 2019. As the next contract expires, it is also sometimes referred to as the "Front month" contract, but with these assets you will trade a "Rolling Futures CFD".
What that means, however, is when the contract expires, there are often unusual movements in the underlying price, so a rolling CFD in the future is subject to a different treatment by your broker compared to a cash CFD.
To understand why this happens, we will look at oil again. Various contracts are traded simultaneously in the underlying market. The most frequently cited is the preceding month, so that is the May contract for settlement on April 18, but other contracts that run for many months in the future are also traded in the underlying market, albeit with less liquidity the further you go the future .
If there is a sudden but temporary supply shortage, the price of the contract for the preceding month (May 19) may start to rise. However, since the June 19 contract does not work on the basis that the interruption of the delivery does not continue, it does not show abnormal behavior. When the contract expires on 19 May, an open-rolling CFD position will in the future be automatically transferred to the contract on 19-19 June, but in the above situation there may be a significant adverse price movement.
As an example:
May 19 contract expires at $ 60
The June 19 contract is traded for $ 55.
Any customer with open positions would therefore be switched, so instead of losing that $ 5 benefit & # 39; & # 39 ;, this would be reflected as a cash adjustment on the bill. Likewise, if the expiring contract was trading below the value of the new contract, the adjustment would be reversed
So in short, the difference between a CFD in cash and a progressive CFD in the future for most traders is minimal. However, the rollover point will result in a number of potentially unexpected money corrections on account, the instrument may not be available for trading for a short time and it must also be ensured that sufficient margin is available to cover such movements
