Dividend Future
Also known as: Dividend swap (OTC cousin)
Trade the dividends a company or index will actually pay in a given year — stripped from the share price.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat is it, really?
When you own a stock, you get two things: price moves and dividends. A dividend future splits the second thing off and trades it on its own. The contract settles on the total dividends an index (or single stock) actually pays in a calendar year.
Buy the 2028 index dividend future at 145 points, and if companies end up paying 155 points of dividends that year, you earn the difference. If boards cut payouts to 130 — as they did dramatically in 2020 — you lose.
Why would anyone want this? Dividends are a bet on corporate cash generosity: steadier than stock prices in normal times, but exposed to sharp cuts in crises. Traders use them to express views on payouts, and banks use them to shed dividend risk they accumulate from other products.
- Asset class
- Equity derivatives
- Instrument type
- Future on realised dividends
- Traded
- Exchange (Eurex pioneered) and OTC
- Typical users
- Structured-product desks, income funds, hedge funds
3 · IntermediateHow it works in practice
Contract design
- Underlying: gross declared ordinary dividends of index members over a December-to-December period, expressed in index points (special dividends usually excluded).
- Settlement: cash, against the officially computed dividend total.
- Maturities: annual contracts listed many years out — a whole dividend curve.
Where the risk comes from
Structured products (like autocallables) implicitly leave issuing banks long future dividends. Banks offload this via dividend futures, which historically depressed long-dated dividend prices below reasonable forecasts — creating a well-known risk premium for buyers.
Behaviour
Near-year contracts converge to already-announced payouts and barely move; distant years trade like credit-sensitive equity risk — in stress they fall harder than the index, because boards cut dividends to preserve cash.
4 · AdvancedPricing & valuation
Relation to the forward curve
Dividends link spot and forward prices: with discrete dividends, \(F_{0,T} = (S_0 - \text{PV}_{0,T}(\text{divs}))e^{rT}\). Dividend futures make PV(divs) directly observable, closing the triangle between spot, index futures and dividends. Arbitrage keeps the three consistent:
What the symbols mean
- Tmaturity, in years
- Sthe price of the underlying today
- Fthe forward or futures price
- rthe interest rate, per year
- ythe yield to maturity
- Dduration: how far a bond's cash flows sit in the future
Pricing the dividend itself
There is no cost-of-carry shortcut for future dividends — they are expectations under the risk-neutral measure, discounted risk-adjustment included:
What the symbols mean
- Dduration: how far a bond's cash flows sit in the future
- ta point in time
- ythe yield to maturity
- Ean expected value
- Pa price, or a present value
- lambdaan intensity, usually of defaults per year
The gap \(\lambda_y\) between real-world forecasts and futures prices is the dividend risk premium, historically positive and increasing with maturity (the structured-flow effect).
Modelling in derivatives books
Equity models treat near-term dividends as cash amounts (robust to price falls) and far dividends as proportional yields (co-moving with the index); dividend futures calibrate the blend. Getting this wrong misprices long-dated options and autocallables materially — dividend risk ("div vega") is a first-class Greek on exotic desks.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.