delta one
Swaps, futures, CFDs and ETFs all give the same one-for-one exposure. What separates them is how the funding, the dividends and the balance sheet are packaged.
concept note · live rateswhat "delta one" means
Delta is how much a position's value changes when the underlying moves by $1. An option might have a delta of 0.4. It moves 40 cents, and that number shifts as the market moves. A delta-one product moves one for one with the underlying, all the time. No curve, no optionality.
So a delta-one product isn't really about the price at all. The price exposure is identical across every wrapper. What differs is who pays for the shares, who gets the dividends, and whose balance sheet it sits on. Delta one is a financing business wearing an equity costume.
A delta-one product is the stock's shadow. It copies every move exactly, but it's made of something different. The shadow of a stock bought on a swap is made of a funding leg. The shadow in a future is made of an implied rate and a dividend forecast. When you compare delta-one products, you're comparing what the shadow is made of.
the delta-one toolkit
| Instrument | How you pay for funding | Dividends | Best for | Catch |
|---|---|---|---|---|
| Cash stock, fully paid | your own cash (opportunity cost) | received, minus any withholding tax | long-term, unlevered holders | ties up capital; HK stamp duty 0.1% each way |
| Cash stock on margin | debit balance at rate + spread | received | simple leverage, shorts via borrowing | margin calls; borrow recalls on shorts |
| Index future | hidden inside the futures price (implied rate) | hidden inside the price as a forecast | cheap, liquid index exposure and hedges | quarterly roll; you bear the dividend forecast |
| Total return swap | explicit floating leg: SOFR/HIBOR + spread | passed through, often net of tax | single stocks, custom baskets, leverage | counterparty risk; ISDA paperwork |
| CFD | daily financing charge | cash adjustments | retail and shorter-term trading | open-ended cost; not available everywhere |
| ETF | none, fully paid (a management fee instead) | paid out or reinvested by the fund | simple, small-ticket exposure | tracking error, fees; can trade away from NAV |
the desk on the other side
When a client goes long through a swap, the dealer is now short the stock's performance, so it buys the real shares to hedge. It is flat on price and left holding a financing position: it paid for the shares and gets paid back through the funding leg.
A delta-one desk's P&L therefore comes from the gaps between what it charges and what it costs: its funding versus the spread, its balance-sheet cost, dividends it forecast versus dividends paid, what it earns lending out the hedge shares, and execution around index rebalances.
The car drives the same whoever is behind the wheel. A rental company makes money on the difference between what the fleet costs to finance and insure, and what it charges per day. A delta-one desk is a rental company for stock exposure.
A future is a delta-one product whose funding rate is hidden in its price. Solve for r to see it.
worked example: futures or swap for a hong kong index long?
Illustrative index and futures prices; HIBOR is live.
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inputsindex S = 25,000 · 3-month future F = 24,950 · expected dividend yield q = 3.5% · 91 days
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implied funding rate in the futureln(24,950 / 25,000) / (91/365) + 3.5%≈ 2.70% a year
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compare with swap fundingHIBOR 3M 3.020% + 45bp spread≈ 3.47%, so the future is about 77bp cheaper as a way to carry the long.
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what could still flip the choicethe future bakes in a dividend forecast (if dividends come in lower, the long loses), it has to be rolled every quarter at whatever the next implied rate is, and it only exists for indices, not your custom basket.
- Delta one = moves one for one with the underlying; price exposure is the same in every wrapper.
- The real differences are funding, dividends, balance sheet and counterparty.
- A future hides its funding rate in its price; ln(F/S)/T + q brings it back out.
- The desk behind a swap is a financing business: flat on price, earning a spread over its costs.