The Top Reasons for a Contract of Difference
A contract for difference is often used if one party to the agreement has a fixed interest rate and another party has an adjustable interest rate.
The fixed-rate payer pays the difference between what they would receive at their fixed interest rate and what they would have received at the other party’s variable or adjustable rates if there were any changes during the contract term.
The first one is that you can enter into a contract for difference with anybody. You do not need to be a finance expert or have any special certification, as with futures and options contracts.
The next reason for entering into a contract of difference is that it has many more uses than just hedging against interest rate fluctuations between two parties.
For example, a COD also protects from inflationary factors such as commodity prices and currency movements, making them ideal for companies who want to watch their income stream but whose costs are affected by these variables.
There could be one hundred reasons why someone would decide upon using this form of agreement instead of some other financial instrument; however, we feel the above three points highlight very good ones which should help convince even those who are skeptical about its benefits.