Contracts for Difference (CFDs) are leveraged products, and if we look at the Romanian version on Wikipedia, there’s a focus on speculation, whereas the English version emphasizes risk mitigation.
Undoubtedly, they were invented in the 90s to mitigate risk, essentially as a form of insurance.
The freedom to initially choose what to invest in (for example, euro-denominated bonds) transforms an asset into a secondary liability because questions about the impact of this choice remain unresolved.
After the investment, a new company environment is created, with the specified initial conditions, which must be adapted to expose the company only to desired risks.
For an ideal lateral step, CFDs offer an optimal solution as they correct certain effects at the lowest possible cost.
We shouldn’t just witness the discovery of the future; it needs to be shaped within certain imposed limits. All effects without an immediate solution (or appetite for a particular risk) must be mitigated.
CFD is the ideal contract for diversification with minimal financial effort, quickly and elegantly.
Market risk, under the Solvency II regime, encompasses the diversification among various types of risks, including currency risk, spread risk, concentration risk, interest rate risk, equity risk, and property risk. Therefore, every step taken must be accounted for, as each mitigation strategy impacts the overall risk.