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Overnight Interest


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Hello,

 

I'm new to spread betting and am currently on a demo account.

 

Looking at my Transaction History I can see the following:

 

CHARGES.pngI

 

I understand that I need to pay overnight interest on my spot bets. However why I am I being credited for the lumber? They are BOTH LONG positions. 

Any insight greatly appreciated. Cheers Bob

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Hey  - welcome to Community.

 

Paying or receiving on an undated commodity is based on the futures curve and whether or not it's upwards or downwards sloping. You can read more on that below, and i've also included a snippet of example over night adjustments on different assets.

 

Our commodity product enables you to take a cost-effective short-term view on 27 key commodity markets.

 

The offering works in the same way as an index CFD. And just like an index position, you’ll pay a funding charge for holding your commodity position overnight.

 

As there are no fixed expiries, we are also able to offer continuous charting on these markets. This means your technical analysis will be available as long as you want it. We have used past data to backdate our charts for the last three to five years, so you can get an accurate historical look.

 

How do we make our prices?

To price these markets we use two futures contracts on the underlying commodity. For each market we look at the contracts that have sufficient liquidity, then use the two with the nearest expiry dates.

 

The one that has the closest expiry date is called the front month contract, and is labelled ‘A’ in our diagram. The one with the second-nearest expiry date is called the back month contract and is labelled ‘B’.

 

As soon as the previous contract expires, the price we offer is equal to the price of ‘A’. When ‘A’ expires, ‘B’ becomes the front month contract, and our price is equal to the price of ‘B’.

 

In between these two expiry points, our price gradually moves from the price of ‘A’ towards the price of ‘B’. Depending on the commodity, the price of ‘B’ can be higher or lower than the price of ‘A’.

 

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Snipping of some markets.

 

2018-04-26 09_41_00-Undated Funding Dialog.png

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Hey thanks for the response.

 

So I understand that the spot price is derived from the two nearest contracts (as a function of time) however I'm still in the dark as to why my account has been credited rather than debited. 


 wrote:

Hey  - welcome to Community.

 

Paying or receiving on an undated commodity is based on the futures curve and whether or not it's upwards or downwards sloping.

 

Can you provide the formula? 

 

Many thanks for any help on this!

 

Cheers, Angribob

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Hey  - I wrote the below a couple of years ago but it still holds true (however the oil prices will be very off for the example!). I have also included two futures Copper and Lumber, which show how some curves can be upwards whilst others can be downwards. Basically people are saying "would I rather pay more to have this deliverable at a later date, or right now?". 

 

1) The formula for calculating the Overnight Basis Adjustment is as follows: 

Overnight Basis = (P3 – P2)/ (T2 – T1) 

T1 = Expiry date of the previous front future 
T2 = Expiry date of the front future 
P2 = Price of front future 
P3 = Price of next future 

For the below explanation we will call the undated futures contract price 'P'. 

This formula therefore takes the difference between prices of the two futures contracts used and divides this by the number of days between the expiry dates of both futures contracts. 

If the slope of the futures curve is upwards sloping you would see a negative overnight funding adjustment posted to your account. If it were downward sloping, you'd expect to see a positive one. 

In this case, the US Crude futures curve is upwards sloping. 

The best way to think about why this is a negative adjustment when you have a long position is by splitting the difference in the price of the futures contracts into individual days. This is done by using the above formula. As the undated contract moves up the futures curve from P2 towards P2, you'd expect P to rise by the same number of points as the daily basis adjustment, all things equal. 

For instance, at the time of writing the current price difference between the MAR-15 and APR-15 US Light Crude contracts is around 62 points and the time difference is 31 days. As such the basis adjustment will be: 

(2930 - 2868) / 31 = 62 / 31 = 2 points per day. 

As such, you'd expect P to rise by this amount each day, all things equal. On the flipside, if you had a short position on this market you'd see a positive adjustment on your account to compensate for price P's movement up the futures curve from P2 to P3.

2) The formula for calculating the IG Annualised Cost is as follows: 

This cost forms part of the adjustment if you are holding the undated contract through 22:00 UK time and has an IG admin fee of 2.5%.

The formula for this is: 

Price x 2.5 % / 365 

Where P again represents the price of the undated contracts at 22:00 UK time. For instance: 

For example 2930 x 2.5 % / 365 = 0.2

3) These two points adjustments are added together.

In the above example, adding these together gives a value of around 2.2 which is the rough charge for the position. You then do 2.2 x Bet Size. There will be a larger value paid on Friday due to the weekend. These adjustments are variable so if you wish to confirm the exact values each day please give us a call.

If you are looking to hold an exposure to US Oil over the longer term you may want to consider holding one of our futures contracts as there is no basis adjustment or IG admin fee posted to the account each night. 

 

2018-05-01 08_57_00-sg2018050131529.gif ‎- Photos.png2018-05-01 08_56_54-sg2018050131828.gif ‎- Photos.png

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