> Will it be positive for the person holding the
> long position to have a higher dividend yield
> growth?
huh?作者: scarecrow 时间: 2011-7-11 19:46
As in who will benefit the most if the growth rate in dividend increases, the person who is in the short or long position on the equity index?作者: scarecrow 时间: 2011-7-11 19:46
I thought growth rate in dividend increases Dividend Yield which then decreases F .. my bad thanks though! appreciated作者: RMontgomery 时间: 2011-7-11 19:46
I don't know about the particular problem mentioned in Schweser, but I couldn't follow why they say the long benefits.
Forward price = FV (Spot price0) - FV (Dividend).
If dividends increase after you went long the contract, the price of the contract will drop, because you will now deduct more in the above formula, making the price go lower.作者: senlinlang 时间: 2011-7-11 19:46
Heres my opinion, he has already locked in the F rate, so what happens after will not affect the rate that he will get, but an increase in div should theoretically make the index price/level increase, so the difference between F and S is now greater
Edited 1 time(s). Last edit at Monday, May 9, 2011 at 09:01AM by pedpenny.作者: kingstongal 时间: 2011-7-11 19:46
They say dividend yield growth, so id assume i higher dividend yield g will increase the index level i.e. the future spot作者: wilslm 时间: 2011-7-11 19:46
May be it's confusing but here is what is clear to me.
Let us say today IBM is trading at $100. You buy a forward contract on IBM for $110 which expires in 1 year.
After two months IBM declares a special dividend of $10 to be paid a day before year end (i.e., a day before contract expires). The price of IBM will then drop $10 on ex-dividend day. You will then pay $110 to own a stock that has just dropped $10.
You (the long) clearly lost (not gained as stated above) due to a rise in dividend. No?作者: giants2010 时间: 2011-7-11 19:46
Yes, but they say dividend yield, so would the index not be more valuable, and therefore command a higher price作者: mp3bu 时间: 2011-7-11 19:46
An increase in the dividend yield should decrease the derivative price otherwise your forward contract would increase in value along with an increase in yield/income which should not fundamentally occur otherwise you'd have an arbitrage opp.
All income received while holding a derivative asset (forward, future, option, etc...) should be subtracted. I don 't think you can assume that the underlying index/stock price increases just based off of the increased dividend yield. We know it should, but for the exam I wouldn't assume that the underlying increased in value unless specifically told so.
thanks though! appreciated