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What is a dividend "future"?

A dividend future is a forward contract traded on an organized market, allowing taking a position on the amount of dividends paid by a publicly traded company to its shareholders for a specific maturity date. It is not necessary to hold shares in the company to intervene in this type of futures contracts.

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That gives the opportunity to some market participants such as arbitrageurs and speculators to take a position, depending on their expectations on the evolution of the amounts that will actually be received by shareholders (see below the calculation of performance)

The performance of dividend futures depends on:

  • During life, the changing expectations of the level of cash dividends and the announcements made by the companies about the future dividends. If expectations or advertisements are better than one day to another, the Future contract will appreciate based on this new information (and vice versa if expectations or news are negative).
  • At maturity, the difference between cash dividend earned on that year and anticipated dividend when buying the Future contract.

As with any forward contract, it is possible to take a long position (buying) or short (selling), while benefiting from the leverage offered by organized markets, through the mechanism of guaranteed deposit that worth much less than the futures contract. Obviously, the presence of the clearing house guarantees the successful completion of transacttions, conducting daily margin calls from all market players throughout the duration of their operations.

Eurex Exchange

Eurex Exchange, one of the world’s leading derivatives exchanges offers a broad range of international benchmark products and the most liquid fixed income markets in the world.

A distinct advantage for operators to not have to deal with a potential counterparty risk, as may be the case on the OTC market. Yet it is on the OTC market that appeared first dividend swaps in the early 2000s. Since then, the interest of stakeholders to these financial instruments has continued to grow, allowing institutional investors to protect themselves in advance against an anticipated decline in dividends paid by various companies held in their portfolios invested in the equity markets. However, it remains that the most active players in this market are investment banks, generally keen to hedge the "dividend" risk they carry in their books via derivatives sold to their customers, such as stock options, for example.

With this keen interest in recent years, a number of organized markets have decided to launch dividends futures and thus compete with the OTC swap market. Today, such contracts are exchange-traded, especially on EUREX, NYSE Euronext, MEFF, Borsa Italiana IDEM, London Stock Exchange, Tokyo Stock Exchange, Hong Kong Exchanges and Clearing Limited or Singapore Exchange.

The range of products offered to market players is now relatively large, through "dividends" futures on the biggest market capitalizations of the stock market, industries or market indices without mentioning the listed options available on these same futures contracts.

In short, now a wide range of products is available in many organized markets to meet the needs of various practitioners acting to hedge, arbitrage or speculate.

Next Finance , February 2014

Article also available in : English EN | français FR

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