who benefit the most if expected growth rate in dividend for stocks increase?

CFA Level II
#1

from schewser mock 2 114, the answer is who long future contracts on equity index, why?

#2

As the dividend yield increases, the spot price of the equity index increases. As the spot price increases the futures price increases, holding the continously compounded interest rate constant.

FP(Index) = So x e(RFc-gc)xT

#3

An increase in the growth rate in dividends for stocks would increase the spot price of the equity index. As the spot price increases, the futures price for a given maturity also increases.

Thus, an investor who is long a futures contract already can enter into a short futures contract at the same maturity for a higher futures price than his long contract.

Effectively, the investor can buy the asset in the future for a fixed price and sell the asset for a higher fixed price – a guaranteed profit.

#4

I think i was confused by why the index would increase if dividend increase?

#5

Because the cash flow is assumed to be reinvested into the index

#6

i missed that where is that from

#7

To be honest, that was my own interpretation from experience. I do not recall learning that within the curriculum, but that is the only logical explanation as to why the index would increase in value if dividend yield increases. Any other thoughts?

#8

so dividend goes up, index goes up, i guess from cf perspective? and call option price goes down

#9

Can we use Gordon model to solve this p0=D0(1+g)/r-g so if g increases P0 increases because of which index goes up?