If div growth on an equity index unexpectedly increases and I hold a short position on an index future I thought I benefited, but schweser exam 5 afternoon session says the LONG gains. Their rationale: Higher div means index value increases and all else equal, the long gains. My rationale: Higher div yield lowers futures prices so if I’m short the future to sell at a fixed price on a certain date my short position benfits. A higher div yield makes futures prices lower I thought. What do you gusy think here?? Which side of the future gains when div yields increase?
Key word is “unexpectedly”. Expected dividends work in the way you described to reduce the price of a stock at the ex-dividend date. The receipt of these dividends has been priced in for a long time. If a stock keeps the same payout ratio, but gets div growth through an unexpected increase in ROE, its price will increase to reflect the unexpected growth.
Thanks…i think we are talking diff concepts. I’m talking about pricing a futures contract on an equity index with a certain cont compounded div yield. If I’m x days into the contract and now that yield measure grows, i would think all the new futures prices will be lower because of the higher yield. Schweser is saying the futures prices will INCREASE becuase index values are higher because of the yield increase. In this case the long futures holder win. I was thinking that my short position would win becuase the higher div yield lowers new futures prices and I have the right to SELL at a higher level than any of the new contracts…
I was upset over the very same question! But I think the key word here is “growth” - dividend GROWTH increases – think “g” g increases, free cash flows increase, values increase… etc. If just dividend PAYOUT ratios increased, with no accompanying earnings growth, then you arrive at completely the opposite answer, as we both did. I don’t know whether it’s fair to be upset with Schweser, or to thank them. This is exactly the kind of BS you can expect from the CFAI this Saturday.