CFD Market Fundamentals: Price

CFD (contract for difference) is a good way for traders to take advantage of a financial instrument without having to pay at a full price. Its a leveraged instrument that offers potentially big returns for a small outlay. Its a derivative of an underlying financial commodity, so it follows that a CFD's price is determined by that asset. In share trading how do you make sure that the prices are actually equivalent of each other?

In ASX there are four factors in place to make sure that the CFD's price is aligned with the price of the underlying:

• The DPS (Daily Settlement Price) of the CFD in ASX is the same price as its underlying asset. This also makes sure that both markets close equally.
• Contract Design and Cashflows – this automatically calculates cash flows such as contract interest and dividend cash flows, on all positions held. This makes the ASX CFD in the same position as its underlying.
• Arbitrage – during the trading hours the price of the ASX CFD and its underlying may diverge. This creates potential profit from the difference in prices. Designated price markers and other traders use the rules of arbitrage to make sure that the prices are close.
• DPM (Designated Price Marker) – appointed by ASX to provide liquidity. This is done by competing with each other to provide tight spreads in the market.

ASX is a regulated market so you can expect that all trading plays by the rules.