## Q:How is interest charged or credited?

A: CFD positions held overnight are subject to overnight financing. Interest is calculated and charged on a daily basis on the contract value. However, for a short contract for difference position, a conventional share sale is simulated so interest calculated on a daily basis will be earned rather than paid. The rate is usually calculated at a margin above (for long CFDs) or below (for short CFDs) the Reserve Bank’s interbank overnight cash rate plus/minus 2 to 3 per cent.## How is Financing Calculated

With CFDs an interest premium is charged on long positions held overnight. For short positions, the interest is paid to you. The interest payment is usually based on a reference rate plus 2 to 3% (if long) or minus 2 to 3% (if short). The reference interest rate is usually a major bank’s overnight lending rate.

Financing is calculated by taking the overall position size, and multiplying it by (LIBOR + say 2%) and then dividing by 365 x the amount of days the position is open. For instance, the interest rate applicable for overnight long positions may be 6% or 0.06. To calculate how much it would cost you to hold a long position for X number of days you would need to make this ‘pro rata’ meaning that you would need to divide the 0.06 by 365 and multiply it by X days and then multiply this by the trade size. So for example, for a trade size of $20,000, held for 30 days, the interest cost would be about $98.6. It is important to note that due to financing, long positions held for extended periods can reduce returns.

## Q:What is LIBOR?

A: LIBOR stands for the London Inter-Bank Offered Rate. This is basically the figure used when London banks lend between themselves and is usually similar to the Bank of England base-rate. LIBOR is also used to calculate the interest on overnight CFD financing.## Q:Why am I charged a financing charge for holding a position overnight?

A: An overnight fee is applicable when holding long CFD positions overnight as then the deal is considered an investment where the broker has lent you money to buy it and is one way a CFD provider makes money from deals.So if you hold a long position overnight you will be charged a financing charge by your CFD provider. The financing interest charge is computed by multiplying the number of CFD positions by the closing price of the market and then further by the financing charge divided by 365 days to convert this to a daily charge.

For instance, what will be the daily interest charge where the investment over which you have acquired some CFDs is worth $20,000?

Financing is worked out as follows:

- Check out the closing price of the investment on which you hold CFDs say $20,000.
- Compute the financing charge by adding the provider’s premium (usually 2.5%) to Libor or RBA cash (say 2 per cent); total in this case would be 4.5 per cent.
- Multiply the investment amount by the financing charge: $20,000 x 4.5% = $900.
- Now dividing this by 365 returns $2.47 which is how much you stand to pay for ‘rolling’ the contract over to another day.

Financing charges on long positions are computed and charged on a daily basis and the charge will fluctuate in par with the value of the investment. So for instance if the investment value increases to $22,000, the overnight financing fee will be $2.71.

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