Shares in the oil company, Georgia plc, are currently priced at 560p–561p by market makers. News is coming through about the failure to find oil in a field it has been exploring for the past year. You do not hold any shares in Georgia but you are convinced that the share price will fall significantly when the failure is finally confirmed on the last test well. 

A spread betting company is offering the following spread on Georgia’s shares: 555p–565p. The notional trading margin required is 10 per cent.

 A contracts for difference company is quoting prices on Georgia of ‘556p bid and 566p offer’. It requires a margin of 10per cent.

You have £20,000 to set aside for either a spread bet deal or a CFD deal in Georgia’s shares, of which £12,000 is to be used as initial margin. The remaining £8,000 will be held in reserve in case of margin calls. Required: 

(a) Use the case of Georgia to describe and illustrate spread betting and contracts for difference. 

(b) What profits/losses will be made on the spread bet if the spread bet prices move to 640p–650p? What is that as a percentage of initial notional trading margin? 

(c) What profits/losses will be made on the spread bet if the spread bet prices move to 480 p–490p? What is that as a percentage of initial notional trading margin? 

(d) What profits/losses will be made on the contract for difference if the contract for difference prices move to 620 p–630p? What is that as a percentage of initial margin? 

(e) What profits/losses will be made on the contract for difference if the contract for difference prices move to 475 p–485p? What is that as a percentage of initial margin?