Calculation Scheme for Continuous Index CFDs
Commodity continuous CFDs can be traded without expiration dates and calculated using unique algorithms or based on near liquid futures contracts. They are determined by two instruments: the nearest futures contract on the stock index and the stock index itself. The latter is the indicative index, which may not be traded on the market. By working with a seasoned and skilled brokerage firm, you can use new technologies that use proven algorithms to form this type of continuous future. You can learn the calculation scheme for continuous index CFDs through this S&P 500 example:
- S&P 500 is the stock index that is made of the share prices of large American companies and traded on US exchanges.
It is calculated using the standards of Standard & Poor's, a known rating agency, as a weighted average market capitalization index of the 500 largest companies. This stock index is continuously calculated every trading day, but only during trading sessions of large US exchanges like NASDAQ Composite and NYSE from 15:30 to 22:00 CET. Hence, it is not calculated for the rest of the time.
- The futures of S&P 500 differ in expiration date and size, and they are traded on the CME (Chicago Mercantile Exchange).
CME provides many different futures, and each is traded for over a year. A futures contract expires quarterly every March, June, September, and December on the third Friday of those months. Hence, you may trade up to five contracts simultaneously as long as they have different expiration dates. The contact with the nearest expiration date will be the most liquid. Futures are traded on the trading days based on the exchange schedule, with small breaks within the day. Reputable brokers exclude periods of low liquidity to form CFDs, so they use future quotes from 2:00 to 22:00 CET.
- Stock index futures are traded for 18 hours, and the index is determined for 6.5 hours within the trading session, which is included in the futures trading session.
The general rule is that the price of the stock index futures is on top of the index value in a contango situation, or below the index value in a backwardation situation, but at a relatively stable intraday value, which is denoted as DevFI. Here, the continuous index CFD forms according to the quotes of the nearest stock index futures. In an on-going trading session, the continuous index CFD coincides with the index. Outside a session but within the nearest futures' trading hours, the quotes point to the nearest futures' quotes minus the difference between the futures and the index by the conclusion of the last trading session in the previous day. Hence, the formula for determining the continuous index CFD is:
Continuous index CFD quotes = quotes of the nearest futures – DevFI, where DevFI = quotes of the nearest futures – value of the index when the last trading session ended.
About the Author:
Araik Zohrabyan is the Public Relations Officer at IFC Markets. He provides current and summarized information to enhance business awareness. His valuable and strategic inputs gives a better understanding of IFC Markets, an International Forex and CFD Broker. IFC Markets is involved in the development and application of new effective projects in the field of financial technologies.