DIVIDEND ARBITRAGE

abhishreshthaa

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DIVIDEND ARBITRAGE


LONG ON STOCK
SIMULTANEOUSLY SELLING THE FUTURES


DERIVATIVE PRICES ARE ONLY ADJUSTED IF THE DIVIDEND EXCEEDS 10% OF THE MARKET VALUEOF THE STOCK MARKET


EG:-CASE STUDY OF HPCL


NEWS- INTERIM DIVIDEND WOULD BE DECLARED BY HPCL ON 5th FEB
24th JAN WITH HPCL CURRENTLY TRADING AT RS292, IT IS UNLIKELY THAT THE DIVIDEND DECLARED WILL BE OVER RS25 A SHARE.


IN SUCH A SCENARIO, THE FUTURES PRICE WILL NOT BE ADJUSTED FOR THE DIVIDEND.


THE FEBRUARY FUTURES ARE AT RS291, A ONE RUPEE DISCOUNT TO THE CASH PRICE.


ASSUME THAT HPCL DECLARES A DIVIDEND OF RS 20.


HERE TRADERS CAN BUY HPCL STOCKS SELL FEB FUTURES.


THUS TRADERS WILL ENJOY THE DIVIDEND WITHOUT INCURRING LOSSES FROM A FALL IN SHARE PRICES.


HPCL SPOT PRICE = 292
FEB FUTURES = 291(ONE RUPEE DISCOUNT IN CASH PRICE)


ASSUME HPCL DECLARES A DIVIDEND OF RS. 20

EX-DIVIDEND PRICE OF HPCL WILL FALL BY RS.20 IN CASH AND FUTURES MARKET


BY SELLING FUTURES, LOSS FROM STOCKS IS COMPENSATED BY PROFIT FROM FUTURES.

TRADER LOCKS IN AGAIN RS. 19 ,DIVIDEND LOSS , THE LOSS FROM HIS COMBINED STOCK AND FUTURES POSITION


 
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