Interview Questions - CFD vs Equity Swap

quant123 · May 7th, 2009, 3:38 am

Just attended an interview in the synthetic products group in a large ibank for a trader role. Among all the questions, below are the two that I don't know how to reply: (1) What is a cfd? (contract for difference, I replied) How is it different between an equity swap and a cfd? Under what conditions are equity swaps preferred to cfd? (2) Imagine you are the trader, what types of risk and hedging you would expect when selling a cfd and equity swap to a client?Any help? Thanks.quant123

quant123 · May 9th, 2009, 2:24 am

To my surprise, the firm called me for a 2nd interview next Tue. Not sure if the two questions will be asked again. Could any of you offer any help as soon as possible? Many thanks.

impulsenine · May 18th, 2009, 2:30 pm

Probably too late, but I think the key difference is that CFDs can be traded on margin and are exempt from U.K. stamp duty. Similar to a vanilla equity swap (and often called just that) since they're cash settled, marked daily, trade OTC, etc. You can get great leverage through a CFD (20:1 or better even).N.

TitanPartners · May 18th, 2009, 3:16 pm

Maybe one response to such questions are questions. Like "what is the payoff conditions, underlying etc ..." given both are bespoke and OTC (although some CFD's are on exchange ...)Lots of risks! Margin risks, counterparty risk, underlying liquidity, operational risk ... goes on ...In general quite a big discussion as the questions are so incredibly open. You could even talk about models, are they correct? etc

quant123 · May 19th, 2009, 2:23 am

Thanks Impulsenine & TitanPartner. Luckily, they did not ask them these questions. Still waiting for their feedback (if any). Anyway, it's good to know more about these products.

KackToodles · May 19th, 2009, 5:43 am

QuoteOriginally posted by: impulsenineProbably too late, but I think the key difference is that CFDs can be traded on margin and are exempt from U.K. stamp duty. Similar to a vanilla equity swap (and often called just that) since they're cash settled, marked daily, trade OTC, etc. You can get great leverage through a CFD (20:1 or better even).N. right, and there are tax and p&l accounting differences too depending on whether your client is a pension fund or a corporation.