Spread Betting the BUXL
Instead of spread betting on stock indices or stock prices, you can become involved in the financial markets by spread betting on the Buxl, sometimes called the Euro-Buxl. Once you know the way to analyze a financial instrument from its chart, you can apply these principles to any financial market.
The Buxl is a German bond, issued by the German Debt Agency, and is a long-term financial instrument. The German Debt Agency has various terms of bonds that it issues, as with most governments. The short term bonds are called Bubill, the medium-term bonds are called Schätze and Bobls, and the long-term bonds are called Bunds and Buxls.
The Buxl is basically a futures contract with a remaining term of 24 to 35 years. It has a notional coupon rate of 4% per annum, and thus its value can be worked back to the present day depending on the buyer’s expectation of future interest rates with other savings accounts. At present, the value is about 27% higher than the face value, at 12,703 – 12,711, which is an indication that the 4% interest rate is better than you can get on the open market.
Sometimes people do not understand why bonds can vary so much in value. After all, the bond has a guarantee of you getting your capital back in a certain number of years, and in between you are issued with interest payments. People tend to think of bonds as a secure way to invest their money, so that they will have some capital growth and a guaranteed return at the end.
To understand why something which has a guaranteed value can vary so much in price you have to consider the effect of trading in that something during the preceding years. Suppose you bought a bond that guaranteed you 4% interest every year, until it returned your capital in 10 years time. It would only be worth the face value of the bond if the interest rate that you could get elsewhere was 4%, too.
For instance, if you could go into a bank and invest your money at 6% return per year, why would anyone want to buy the bond from you at its face value, and only get 4%? The only way you could sell the bond would be by offering it at a lower price, so that the effective interest rate on the money paid for it would be a little higher than the 4%. This is despite the fact that the buyer would receive the face value after 10 years – because it is so far in the future, it is not so important.
On the other hand, if a bank only offered 2% on a savings account, everybody would want to buy the bond from you, and supply and demand being what they are you could sell it for a higher price than face value. That is precisely the situation which applies at the moment, with low interest rates in the general market.
So the price of the Buxl should in theory be 10,000 if the general market no risk interest rate is expected to be a steady 4%, higher if the interest rates are lower, and less if rates should go higher than 4%. As the value is dependent on traders’ views of interest rates to come, the chart will go up and down.
Spread Betting on the BUXL
The Buxl is a long-term bond issued on the German market. With a notional interest rate of 4%, any time the market interest rate is, or is expected to be, different from this you can expect the value to vary from the face value of the bond. In effect, you are betting on the general direction of interest rate. The current price for spread betting on the Buxl is 12,703 – 12,711.
If you believe that no risk interest rates are going to go up, then you might expect the value of the Buxl to go down. Perhaps you would bet £10 per point at the selling price of 12,703. Suppose you are correct, and market forces move the price of the Buxl lower to 12,356 – 12,364. You can easily figure out how much you have won with your short bet by following this process: –
- Your sell spreadbet was placed at 12,703
- It closed at 12,364
- That means you have gained 12,703 less 12,364 points
- That works out to 339 points
- Your bet was for £10 per point
- Therefore your total profit is £3390
Before you place your bet or trade, you should work out what you could lose. No one wins all the time, and you must be sure that your possible loss is not so large that it prevents you from carrying on spread betting. Perhaps the Buxl went up to 12,765 – 12,773, and you had to close to limit your loss. In this case: –
- Your sell bet was placed at 12,703
- It closed at 12,773
- That means you have lost 12,773 less 12,703 points
- That works out to 70 points
- Your bet was for £10 per point
- Therefore your total loss was £700
As a further example of a spread bet on the Buxl, consider that you might have placed a long bet for £5 per point in the first place, particularly if you thought that interest rates would fall further and make the Buxl more desirable and hence more valuable. If you are right, then the Buxl might have gone up to 12,966 – 12,974, and you would decide to close your bet and collect your winnings.
- Your long spreadbet was placed at 12,711
- Your bet closed at 12,966
- That means that you gained 12,966-12,711 points
- That is 255 points
- You wagered £5 per point
- That means you have won £1275
Once again, you must remember that many bets fail to go in the direction that you want, and be ready to close your spread betting bond position quickly to minimize your losses if this is the case. Say the price dropped to 12,662 – 12,670, and you closed your spreadbet and accepted your loss -:
- Your long bet was placed at 12,711
- Your bet closed at 12,662
- That means that you lost 12,711-12,662 points
- That is 49 points
- You wagered £5 per point
- That means you have lost a total of £245
Join the discussion