Business and Personal Finance Dictionary

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 

• CONTRACT FOR DIFFERENCE
  
  Definition: An OTC Currency Forward Contract that settles for a cash amount, perhaps in a third currency, without requiring the exchange of the two underlying currencies. Example: Instead of settling a Forward Contract by having party A deliver 10,000,000 DEM (worth 6,000,000 USD) in Germany and party B deliver 600,000,000 JPY (worth 6,100,000 USD) in Tokyo, party B would deliver the net dollar value of the two payments (100,000 USD) in New York. Application: The CFD would reduce the problem of Herstatt Risk (q.v.). Pricing: Prices for the two legs of the transaction should be readily visible in the liquid currency markets. Risk Management: This tool is for managing market risk, while managing settlement risk. Comment: Source: Laure Edwards, "Chase Manhattan Offers an Answer to BIS Concerns," Financial Trader 4 (June 1997), p. 7.
  
  Back