hassan

janardhanc Wrote:
-------------------------------------------------------
> All the loss or gain on stock must only accumulate
> to Long because short is in arbitrage free
> position. However, dividend payout changes will
> effect short because FV of assumed continuous
> dividend cash inflows are removed when pricing
> forward. If suddenly firm decides to pay no
> dividends, its a cash loss to short or suddenly
> firm pays extra dividends its a cash gain to
> short.
>
> Yes if the stock price goes up and you value the
> forward Long may profit. But next day if the stock
> price goes down Long may loose. However higher
> dividends paid out to short mean while is a real
> additional cash flow.


Did anybody understand that?

xilige

^ agreed. good explanation.

zephyranalyst

All the loss or gain on stock must only accumulate to Long because short is in arbitrage free position. However, dividend payout changes will effect short because FV of assumed continuous dividend cash inflows are removed when pricing forward. If suddenly firm decides to pay no dividends, its a cash loss to short or suddenly firm pays extra dividends its a cash gain to short.

Yes if the stock price goes up and you value the forward Long may profit. But next day if the stock price goes down Long may loose. However higher dividends paid out to short mean while is a real additional cash flow.



Edited 1 time(s). Last edit at Friday, May 13, 2011 at 04:11PM by janardhanc.

Swanand

this thread is a the WEEDS, and so is that post, GET OUT!

Kapie

Nice explanation SeesFA, I think you are correct.

I think the confusion relates to whether we are holding the stock's price constant or not. For two identical stocks with the same price where the only difference is the dividend yield, the forward price "X" will be lower for the higher dividend yield stock.

But if we are not holding the stocks price constant, your logic makes sense - and I think this is the correct interpretation. The stock price simply rises after the dividend yield increases.

But similarly (and this is confusing) if the stock price stays the same, and the dividend yield increases, the SHORT is the one who gains.



Edited 1 time(s). Last edit at Friday, May 13, 2011 at 05:25PM by Binky123.