Risk Warning
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
66.3% of retail investor accounts lose money when trading CFDs with IBKR (UK).
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
INTRODUCTION
Open Trade Equity (OTE) and Variation Margin (VM) are two methods by which brokers report CFDs to clients. While account equity and position P/L are identical under the two methods, they are represented differently for statement reporting purposes. An overview of each method is provided below for a sample position.
SAMPLE POSITION
Assume a position in which the client has a starting cash balance of $2,500 and purchases 100 CFD contracts of hypothetical contract "ABC" at a price of $100. Further assume that the closing price of ABC is $100 on Day 1, $110 on Day 2, $95 on Day 3 and $105 on Day 4.
VM MODEL
In the VM model we calculate variation margin as the difference between the closing price of the day and the closing price on the previous day with the difference applied to cash.
The realized profit is the difference between the price at which you opened the position and the price when closed, however, as both the Trade and Position Variation are booked to cash, the Cash Balance equals Account Equity.
In this example:
Day 1 | Day 2 |
Day 3 |
Day 4 |
|
Price | $100 | $110 | $95 | $105 |
Traded Size | 100 | 0 | 0 | (100) |
Position VM |
$0 | $1,000 | ($1,500) | $0 |
Trade VM | $0 | $0 | $0 | $1,000 |
Realized P&(L) | $0 | $0 | $0 | $500 |
Starting Cash | $2,500 | $2,500 | $3,500 | $2,000 |
Ending Cash | $2,500 | $3,500 | $2,000 | $3,000 |
Account Equity | $2,500 | $3,500 | $2,000 | $3,000 |
OTE MODEL
In the OTE model, the accumulated P&L is carried as OTE, which is the difference between the closing price of the day and the price at which you opened the position. OTE is a component of equity, but not cash. Equity therefore is Cash + OTE, and consistent with the VM model above.
The realized profit is again the difference between the price at which you opened the position and the price when closed it, however, since the running P/(L) is booked as OTE it is only the applied to the Cash Balance once realized.
Day 1 | Day 2 |
Day 3 |
Day 4 |
|
Price | $100 | $110 | $95 | $105 |
Traded Size | 100 | 0 | 0 | (100) |
OTE |
$0 | $1,000 | ($500) | $0 |
Realized P&(L) | $0 | $0 | $0 | $500 |
Starting Cash | $2,500 | $2,500 | $2,500 | $2,500 |
Ending Cash | $2,500 | $2,500 | $2,500 | $3,000 |
Account Equity | $2,500 | $3,500 | $2,000 | $3,000 |