If dividends growth rate on stock forward increases who gains, short or long?作者: sameeragarwal 时间: 2011-7-11 19:51
Think of it like this. A long is always a buyer and a short is always a seller...for any asset. So if dividends growth rate on a stock increases that will increase the intrinsic value of the stock. Since its a forward the person who owns that stock in the future will benefit from the higher valuation. If the growth rate would have been higher when the forward was priced it would have cost more to enter into the transaction.作者: BelalM 时间: 2011-7-11 19:51
Yes if they declare a larger dividend than expected, but your question says the dividends growth rate increased, not the pending dividend.作者: giants2010 时间: 2011-7-11 19:51
Does it matter? Increase in dividend is free cash flow for short until expiration, because forward is priced to be arbitrage free at initiation.
Any increase in the stock price will benefit long at expiration, but the additional dividends paid are loss for long since they were not factored in at contract initiation and the whole point that someone is long on the stock forward would be to capture all the growth. However, the expected stock price using discount models is irrelevant in forward evaluation.作者: MiniMe7 时间: 2011-7-11 19:51
It's the dividend growth rate that increases, not just a few dividends. Dividend growth rate increases is just another name for "stock value increases" so obviously the long benefits.作者: Otabek 时间: 2011-7-11 19:51
if dividend growth rate increases then long benefits however if we look at the formula
F = S x e power (rf - dy)n/N .. if Dy increases then F will be lower.. which is future price..
it is confusing, that's for sure..作者: cv4cfa 时间: 2011-7-11 19:51
Bilal Wrote:
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> F = S x e power (rf - dy)n/N .. if Dy increases
> then F will be lower.. which is future price..
That's before you went long, so it's irrelevant.作者: maryli 时间: 2011-7-11 19:51
I agree that the short benefits from an increase in dividends, since they are holding the stock in an arbitrage-free situation.
If we have a forward price "X", maturing at time "t", the long could invest X / e^rt to have X dollars at time t.
The short could purchase the stock at price "S", and then hold it to time t to deliver the stock. These transactions must be equivalent to avoid arbitrage, so the forward price can be calculated as follows, where d is the continuous dividend yield:
X / e ^ rt = Se^(-dt), ==>
X = Se^(-dt+rt)
Now say that the dividend yield "d" is higher than originally expected. This would cause the arbitrage-free forward price "X" to be lower. So the short gains and the long loses.
Edited 1 time(s). Last edit at Friday, May 13, 2011 at 01:21PM by Binky123.作者: wilslm 时间: 2011-7-11 19:51
Same problem here...you are mixing the times of when the person goes long and when the dividend yield changes. Also, note that the dividend yield changes every minute of trading, so it will always be higher or lower than originally expected.作者: RepoToronto 时间: 2011-7-11 19:51
This thread is confusing. Let's break it down.
t=0: You go long a stock forward (you agree to buy a stock at time T, for $K). There is no cost in entering a forward.
0<t<T: The dividend growth rate increases => St increases in value
t=T: Payoff for long contract is St - K, which is now greater.
The long benefits.
______________________
We are not long and short the asset. We are long/short the forward contract.
Agreed?作者: hassan 时间: 2011-7-11 19:51
janardhanc Wrote:
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> 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?作者: xilige 时间: 2011-7-11 19:51
^ agreed. good explanation.作者: zephyranalyst 时间: 2011-7-11 19:51
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.作者: Swanand 时间: 2011-7-11 19:51
this thread is a the WEEDS, and so is that post, GET OUT!作者: Kapie 时间: 2011-7-11 19:51
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.
