# Overnight fees in Trading explained

The daily loss of value, whether trading in futures, CFDs or leveraged products, is a significant factor for long-term investments. As a rule, however, it is almost always underestimated. For this purpose, we take a look at the concrete figures in a direct duel.

Whether you trade futures, CFDs or derivatives, there is one thing you cannot avoid: a daily loss in value. Whether this is called current value for options and derivatives, financing costs for CFD transactions or fair value for futures: the long side of the market is getting expensive every night. How expensive, and how big the differences between the instruments are, we want to look at with this article.

We use the popular Dax30 index as an illustrative example.

## FDax (Future)

A new Future-Dax contract is launched every 3 months. And most traders should have noticed that the price of the FDax differs from the spot Dax. A new contract will trade about 20 points higher than the spot Dax, and will approximate the spot Dax by the end of its 3-month term.

Who is interested in the concrete formula:

F = K x (1-c)^t

Explanation: F = futures price; K = spot price, c = net financing cost rate p.a. and t = duration of the remaining term of the future in years.

We can therefore state that bullish investors lose or have to pay 20 points per night : 90 days = 0.22 points approx. for the investment beyond the close of trading.

## CFDs

Financing costs for CFDs are due, because you trade on the credit of the broker, so to speak. This is because usually only 1% margin has to be deposited for trading with the most important indices. I.e. for 1 Dax-CFD you have to deposit a margin of 90€ at a level of 9,000 points. The broker pays for the rest and charges interest.

At least these can be calculated simply and exactly. On average, providers charge the interest rate of the Euribor + 2.5% for a long position in the Dax30 CFD. Concrete example:

9,660 (Dax rate) * (0.25% (Euribor) + 2.5% ) / 360 = 0.74 points per night

That is already much more than with the top class, the future, now to the last asset class.

## Warrants

The time value is the difference between the warrant price and its intrinsic value.

Time value = warrant price – intrinsic value

The factor fair value is determined by the remaining term to maturity, the underlying interest rate, the current price of the underlying, the volatility of the underlying and the amount of the dividend (in the case of shares). The fair value is subject to an increasing decline in value. The closer the warrant approaches maturity, the more the time value shrinks.

You can already see that in contrast to CFDs, it is much more complex to find out the time value of warrants and certificates. This is not only annoying, but also simply not transparent to the customers. Because the underlying volatility is also constantly changed by the issuers, so that the investor never knows exactly how the price of the derivative actually comes about.

Fortunately, various databases at least show the “intrinsic value” in the warrant’s profile.

Example Dax-Call ISIN DE000HV9PBX4, strike price 9,500, expiration on 17.06.14. This is about 4 months after the creation of this article, and the call is easily in the money at a current Dax level of 9,660 points.

Its intrinsic value is 1.6€, the warrant is quoted at a price of 4.36€. This means that the warrant loses time value until the end of its term in 4 months = 4.36 – 1.6 = 2.76€ time value until the end of its term if all other parameters would remain the same. Converted to the subscription ratio taking into account 120 days remaining term, this is a loss of 2.3 points per day or 9% p.a.

Although only in the grey theory, since umpteen parameters can change constantly. But pi times thumb, this is an appropriate, frightening value. I didn’t pick an extreme example, with similar notes both in and out of money and with different remaining terms I get overnight costs of 1.5 to 4.2 points.

## Certificates

The many different types of certificates make a comparison difficult. Therefore I will concentrate on the most popular type, the KO certificates. Here you have to differentiate between certificates with endless and those with limited duration. The latter also have a premium for the time value, which decreases until maturity and has to be paid by the investor. However, this premium is almost always cheaper than for warrants; a glance at comparison calculators shows a premium of 0.8-5.6% p.a., depending on the distance of the knock-out threshold and the remaining term.

While notes that run endlessly receive an adjusted knockout threshold from the issuers on a regular basis, which also implies that a premium is collected. However, this is difficult to quantify, but it will remain within a similar range.