Service Navigation

Underlying of the month: Dividend Derivatives

Release date: 27 Feb 2014 | Eurex Exchange

Underlying of the month: Dividend Derivatives

Get ready for the dividend season

Dividend Derivatives have been traded in Europe over the counter for more than a decade.

Mostly known as dividend swaps, they could be linked either to the dividends of a single company or of an index. The index dividend swap initially grew from banks’ needs to manage their dividend exposure in structured products and the appetite from hedge funds to take on the exposure. Since then, the awareness of dividends seen as a separate asset class has been rising steadily and rapidly. This is evidenced by the constant rise in traded volumes and open interest. Dividend derivatives have clearly become a product segment of their own.

In Asia, three exchanges have offered dividend index futures for trading since 2010: The Japan Exchange Group and the Singapore Exchange on Japanese dividend indexes and the Hong Kong Exchange on Hang Seng/Hang Seng China Enterprises Dividend exposure.

Many markets are benchmarked by price indexes in which dividend returns are excluded from index calculations. This leads to a dividend risk in the derivatives products linked to price indexes. Dividend index futures provide a method of hedging against the resulting dividend exposure.

Eurex Exchange - pioneer in exchange-traded dividends

We introduced our EURO STOXX 50® Index Dividend Futures in 2008 as the first exchange globally. Eurex dividend futures were welcomed by product users because the contract specifications have been closely modelled after the OTC dividend swaps. Market participants have been attracted by the facility to trade the separated dividend stream in a regulated market and with central counterparty (CCP) protection. Since then, we have continuously expanded our dividend product portfolio, at first with index-based contracts and since 2010 also with contracts on single stocks. We now offer exchange-listed dividend futures on over 80 of the largest Eurozone and pan-European companies. Eurex Dividend Futures and Options now create a liquid alternative to the OTC offering.
Our customers like the benefits of on-exchange trading, mainly due to the ability to open a position with one counterpart and closing it against another and with the central counterpart in between. The aggregate 124 dividend contracts listed on Eurex trade a daily average of 43,080 contracts a day with an order book share of over 28%. In some products the order book volume even surpasses the block trading volume, e.g. the dividend index futures trade over 59% in the order book.

Our product design also guarantees the efficient handling of corporate actions and a daily mark-to-market. If investors want to avoid equity risk and implement a strategy based on their view of future dividend payments, they can choose between different approaches:

  • Investing in a long spot (including financing) and short equity forward combination, which
  • practically equates to a dividend swap
  • Using long/short combinations of different equity forwards/futures, which would lead to dividend exposure between the two expirations
  • Buying and selling equity options based on put/call parity
  • Using new instruments such as dividend options or futures

What are the benefits?

  • Dividends are less volatile than equities. Companies are often reluctant to cut them, even in a bad year.
  • Dividends tend to rise with inflation and can work as a hedge against inflation.
  • Since September 2013, you can profit from a new attractive pricing for our Single Stock Dividend Futures, based on the level of dividends.
  • In contrast to dividend swaps you benefit from the mitigation of counterparty risk via Eurex Clearing.
  • You can also clear your OTC contracts via Eurex Clearing and reduce your margin requirements through cross margining.