Dividend payouts, how do they affect Futures Prices?

Discussion in 'Stocks' started by insight, Jan 4, 2006.

  1. insight


    I have a question regarding the effect of dividend payouts on a stock market index.

    If a certain day has a large number of companies going ex-dividend does this whack the futures price to any degree?
  2. Chagi


    I can only comment on this in theory rather than in practice, but from a textbook perspective going ex-dividend should actually increase a futures price rather than decrease it, because you are subtracting the income. But the price of the underlying decreases, so hmmmmm.....

    I think the answer is that the futures price is roughly unchanged?

    Here are a couple of formulas for you from my risk management text:

    Futures price of a stock index

    F = S*e^[(r-q)t]

    Another somewhat similar way of looking at this would be the forward price of something with income:

    F = (S-I)e^(rt)

    So by decreasing "q" you are increasing the futures price, but when underlying goes ex-dividend, S should decrease....

    In the above, F is the future/forward price, I is income, q is yield, t is time in years, r is risk-free rate (which is continuously compounded in this case).
  3. insight


    Excellent reply, thanks :)
  4. Chagi


    No problem, but I would like to see some further discussion/opinions regarding this.
  5. Just my offhand guess (as a CFA, I'm 'sposed to know this):

    The payouts shouldn't affect the futures price, but the stocks will drop, NARROWING THE SPREAD between the futures and the cash index.