Author Topic: Dividend futures  (Read 1067 times)

Lupo Lupus

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Dividend futures
« on: January 11, 2018, 01:55:01 PM »

FT Alphaville has an interesting article on dividend derivatives:

https://ftalphaville.ft.com/2018/01/10/2197424/why-do-futures-markets-imply-a-depression-level-collapse-in-european-dividends/

Basically long term dividend futures price in a 20% decline in Eurostoxx dividends, something that is unlikely to happen. FTAV argues that there might be an arbitrage opportunity (go long in the long futures). A reason for the potential mispricing is hedging demand by banks.

The article also mentions some caveats, and some further are in the comments section. On top of this I can see three more reasons for the low pricing:

Payout ratios may decline in the future
Firms with less dividends may enter the index
The discount to expected value represents a required return (risk premium), similar to stocks.

Dividend derivatives are in principle very interesting because you get a claim on something that is not depending on the market (if held until maturity your pay-off is not subject to market vaguaries) and hence provides a good diversification opportunity.

Here is also a short overview article on dividend derivatives:

https://www.mckinleycapital.com/investing-dividend-strips-using-dividend-derivatives/

Would be interested in your views!


TwoCitiesCapital

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Re: Dividend futures
« Reply #1 on: January 11, 2018, 07:55:34 PM »

FT Alphaville has an interesting article on dividend derivatives:

https://ftalphaville.ft.com/2018/01/10/2197424/why-do-futures-markets-imply-a-depression-level-collapse-in-european-dividends/

Basically long term dividend futures price in a 20% decline in Eurostoxx dividends, something that is unlikely to happen. FTAV argues that there might be an arbitrage opportunity (go long in the long futures). A reason for the potential mispricing is hedging demand by banks.

The article also mentions some caveats, and some further are in the comments section. On top of this I can see three more reasons for the low pricing:

Payout ratios may decline in the future
Firms with less dividends may enter the index
The discount to expected value represents a required return (risk premium), similar to stocks.

Dividend derivatives are in principle very interesting because you get a claim on something that is not depending on the market (if held until maturity your pay-off is not subject to market vaguaries) and hence provides a good diversification opportunity.

Here is also a short overview article on dividend derivatives:

https://www.mckinleycapital.com/investing-dividend-strips-using-dividend-derivatives/

Would be interested in your views!

It is a very interesting concept. Harley Bassman of PIMCO pointed this out at the end of 2016 as well. The fact that the trade is still alive and well suggests it wasn't a top performer in 2017, but the logic of his trade was sound.


Lupo Lupus

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Re: Dividend futures
« Reply #2 on: January 11, 2018, 11:45:03 PM »

FT Alphaville has an interesting article on dividend derivatives:

https://ftalphaville.ft.com/2018/01/10/2197424/why-do-futures-markets-imply-a-depression-level-collapse-in-european-dividends/

Basically long term dividend futures price in a 20% decline in Eurostoxx dividends, something that is unlikely to happen. FTAV argues that there might be an arbitrage opportunity (go long in the long futures). A reason for the potential mispricing is hedging demand by banks.

The article also mentions some caveats, and some further are in the comments section. On top of this I can see three more reasons for the low pricing:

Payout ratios may decline in the future
Firms with less dividends may enter the index
The discount to expected value represents a required return (risk premium), similar to stocks.

Dividend derivatives are in principle very interesting because you get a claim on something that is not depending on the market (if held until maturity your pay-off is not subject to market vaguaries) and hence provides a good diversification opportunity.

Here is also a short overview article on dividend derivatives:

https://www.mckinleycapital.com/investing-dividend-strips-using-dividend-derivatives/

Would be interested in your views!

It is a very interesting concept. Harley Bassman of PIMCO pointed this out at the end of 2016 as well. The fact that the trade is still alive and well suggests it wasn't a top performer in 2017, but the logic of his trade was sound.

The "underpricing" of future dividends was even more pronounced a year ago, so the trade may have well worked. Personally, I am thinking about less in terms of short-term trade but more with the intention to hold to maturity (of course market fluctuations provide an option for exiting earlier).