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.