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:
Is short futures contracts on the equity side
Is long futures contracts on the equity side
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.