Confused on this question. Please help.


If the expected growth rate in dividends for stocks increased by 75 basis points, which of the following week due benefit the most? An investor who:

  1. Is short futures contracts on the equity side

  2. Is long futures contracts on the equity side

  3. Has a long position in put options on the equity index

My Answer - 1.

Correct answer - 2


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 (holding interest rates constant). Higher dividends during the short period of time untill maturity of the futures contracts would have only a minimal negative effect on the futures price


As per the no arbitrage model F=S.e^(r-d) , If the dividend rates increase then the futures price will decrease. This will be help investors on the short side since they will have +ve value. I am really not understanding the rationale behind the solution that is provided. Please help.

Bumping this to the top. Please help.

It is true that the dividend increase will drop the price of the spot on the ex-div date.

However, the question is talking about the growth rate of dividends. According to DDM, as G increases, the value of the equity increases. When your equity increase, so does the long futures position.

The second part of the explanation is saying that the dividend payoutout on the ex-div date will only slightly negate the larger increase due to the higher valuation of the equity position.