Overnight fees for spot commodity markets

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The underlying market of spot commodities is the futures market that is traded in exchanges around the world. Please see below how the dynamics are affecting overnight fees:

The two nearest by their expiry date futures contracts on the underlying commodity are used to create the spot prices. Over the period, the spot price (P) will always be between the price of the most recently expired future contract (F0) and the price of the following future (F1). Irrespective of which price is higher, the spot price gradually moves from the closest (as per the expiry date) future contract (F0) to the next one (F1).

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Therefore, there is going to be an adjustment on the price, from (P0) to (P1), at the end of each trading day, at the same time as the overnight fees are subtracted/credited from your trading account.

Overnight fee percentages are altered by an amount opposite to this adjustment, to counter its effect, so that this adjustment should not create any profit or loss opportunities. This adjustment depends on the difference in the price between the two futures contracts mentioned above and should be considered as an adaptation to the market dynamics.

Example

Let us take CFDs on US Crude Oil Spot as an example.

‌We are 25 days before the expiration date of the closest futures contract F1= $45. The price P0 of the most recently expired contract F0, is equal to $40. Let’s calculate how much the daily adjustment and the overnight fee would be. Assume that interest is 4% annual.‌

Daily adjustment:

Adjustment= ((F1- P0) ÷ days till expiration) ÷ price =((45 - 40) ÷ 25) ÷ 40 = 0.5%

Overnight fee percentage:

Overnight fee long percentage =

-daily interest - daily adjustment = - 4% ÷ 360 - 0.5% = -0.51%

Overnight fee short percentage =

-daily interest + daily adjustment = - 4% ÷ 360 + 0.5% = +0.49%

The adjustment in the above example positively affected the overnight fee for the short position and negatively affected the overnight fee for the long position. This is because the price is positively adjusted daily, and so the overnight adjustment needs to counter-impact it. Remember that this adjustment does not exist to create profit or loss opportunities, but to make sure clients trade seamlessly in markets that otherwise have expirations.

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