Swaps & CFDs — course checkpoint

You started this course with two words that sounded like jargon. You finish able to build a swap's cashflow schedule by hand, compute a CFD's daily carrying cost, and state precisely what leverage does to every term in the equation. Let's gather it before the checkpoint quiz.

Swaps, in one breath

A swap exchanges two streams of cashflows on a notional that never moves. The fixed rate is set so the contract is worth zero at inception — and worth something else the very next day, because value is the gap between your rate and today's rate, discounted, and amplified by remaining tenor. That mark-to-market is settled in cash, daily, which is why an economically perfect hedge can still create a liquidity problem.

The formulas from Unit 1:

• Leg payment = Notional × rate × period
• Net settlement = the difference only
• Value to the fixed payer ≈ (today's rate − your fixed rate) × Notional × annuity factor — the receiver's value is the exact mirror

The three variations that matter

• FX swap — collateralised borrowing across currencies. The forward rate is arithmetic from the two interest rates, not a forecast; the cross-currency basis is the deviation, and it widens under funding stress.
• Cross-currency swap — the long-dated version, with interest exchanged throughout and principal at both ends.
• Total return swap — the whole economics of an asset for a financing cost. Ownership and exposure come apart, and with them go voting rights, the ability to hold through a drawdown, and — historically and variably by jurisdiction — visibility in ownership filings.

What Archegos demonstrated

Roughly $10 billion of capital, exposure many times that across several prime brokers, none of whom saw the aggregate; concentrated positions held as swaps rather than shares; a price fall, unmeetable margin calls, and simultaneous liquidation into the names being liquidated. About $10 billion of bank losses, regulatory fines, and a criminal conviction. Leverage is a system property. Every individual book looked fine.

Post-2008 reform — central clearing, initial and variation margin, trade reporting, organised execution — moved most interest-rate derivative notional into clearing houses. It never extended central clearing, or visibility of one client's aggregate position across brokers, to single-name equity swaps — which is why 2021 happened after a decade of reform.

CFDs, in one breath

A retail-facing total return swap. You never own the underlying, and the broker is your counterparty. P&L is computed on the notional; margin is a deposit, not a ceiling.

The formulas from Unit 3:

• Leverage = Notional ÷ Margin
• Equity move = L × price move
• Close-out move at a 50% rule = 1 ÷ (2L)
• Daily financing = Notional × (reference rate + markup) ÷ 365
• Annual financing as a share of margin = L × the all-in rate

And the worked figure worth carrying: $50,000 notional at 7% costs $3,500 a year — 35% of a $10,000 margin — before spread, commission or a single adverse tick.

The arithmetic of ruin

Total loss at 1 ÷ L; close-out at 1 ÷ 2L. At 20:1, that's a 2.5% move. Recovery needs D ÷ (1 − D), and no percentage recovers a zero. Gaps ignore all of it — 15 January 2015 moved a major currency pair about 30% in minutes, past every stop in the market.

The two honest facts

1. The documented loss statistics. Regulators require firms to publish the share of their retail accounts that lose money; the reported figures — including ESMA's 74%–89% finding — sit largely in the 70s and 80s percent. Stated as information, exactly as a base rate should be.
2. The structural conflict. On the internalised part of a broker's book, your loss is its revenue. Disclosed, supervised, and real. Knowing who profits from which outcome is a question worth asking of every financial product you meet.

What this course deliberately did not do

It never suggested using a CFD, a swap, or any leveraged product — not once, not implicitly. It never claimed any strategy works. Every figure was rounded and illustrative, every case study factual and sourced to public reporting, and every regulatory description generic, because rules differ by jurisdiction and change. Nothing here was legal advice or investment advice.

Before you sit it

Each of these is a minute at your desk. Any one that is not names the lesson to reopen first.

• Say who pays whom in a fixed-for-floating swap when rates rise — How does a fixed-for-floating swap actually pay out?
• Say what a total return swap transfers, and what it deliberately does not — What does a total return swap actually transfer?
• Say what holding a CFD overnight costs you and where that charge comes from — What does it cost to hold a CFD overnight?
• Say what a 5% move against you does at twenty times leverage — What does a 5% move do at 20x leverage?

Try it now

1. Build one complete swap on paper: $10,000,000 notional, three years, 4% fixed, and three floating fixings taken from real history — SOFR, read on the first business day of 2024, 2025 and 2026, below. State the net to the fixed payer.

2. Build one complete CFD on paper: a real price, Apple's latest share price below, 1,000 units, 5:1 leverage, and the latest SOFR print, also below, as the benchmark. State notional, margin, close-out move, daily financing at that benchmark plus 2.5%, and the annual financing as a percentage of margin.

3. Write the two sentences that close this course honestly — one describing what leverage multiplies, and one describing who is on the other side of the contract. If both are neutral, factual and free of any recommendation, you've learned exactly what this course set out to teach.

Checkpoint quiz next. Nothing in these sixteen lessons was a recommendation to use a swap, a CFD, or leverage of any kind — you've learned the mechanics and the arithmetic that describe them, which is a skill, not a signal.