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Pricing index futures given expected dividend amount

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Sunanda K. Chavan
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Pricing index futures given expected dividend amount - October 1st, 2010

The pricing of index futures is also based on the cost-of-carry model, where the carrying cost is the cost of financing the purchase of the portfolio underlying the index, minus the present value of dividends obtained from the stocks in the index portfolio.

Example

Nifty futures trade on NSE as one,two and three-month contracts. What will be the price of a new two-month futures contract on Nifty?

1. Let us assume that M & M will be declaring a dividend of Rs. 10 per share after 15 days of purchasing the contract.

2. Current value of Nifty is 1200 and Nifty trades with a multiplier of 200.

3. Since Nifty is traded in multiples of 200, value of the contract is 200*1200 = Rs.240,000.

4. If M & M has a weight of 7% in Nifty, its value in Nifty is Rs.16,800 i.e.(240,000 * 0.07).

5. If the market price of M & M is Rs.140, then a traded unit of Nifty involves 120 shares of M & M i.e.(16,800/140).

6. To calculate the futures price, we need to reduce the cost-of-carry to the extent of dividend received. The amount of dividend received is Rs.1200 i.e.(120 * 10).

The dividend is received 15 days later and hence compounded only for the remainder of 45 days.

To calculate the futures price we need to compute the amount of dividend received per unit of Nifty. Hence we divide the compounded dividend figure by 200.

7. Thus, futures price F = 1200(1.15) 60/365 {120*10(1.15) 45/365 /200} =Rs. 1221.80
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Rose Marry
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Re: Pricing index futures given expected dividend amount - April 16th, 2016

Quote:
Originally Posted by sunandaC View Post
The pricing of index futures is also based on the cost-of-carry model, where the carrying cost is the cost of financing the purchase of the portfolio underlying the index, minus the present value of dividends obtained from the stocks in the index portfolio.

Example

Nifty futures trade on NSE as one,two and three-month contracts. What will be the price of a new two-month futures contract on Nifty?

1. Let us assume that M & M will be declaring a dividend of Rs. 10 per share after 15 days of purchasing the contract.

2. Current value of Nifty is 1200 and Nifty trades with a multiplier of 200.

3. Since Nifty is traded in multiples of 200, value of the contract is 200*1200 = Rs.240,000.

4. If M & M has a weight of 7% in Nifty, its value in Nifty is Rs.16,800 i.e.(240,000 * 0.07).

5. If the market price of M & M is Rs.140, then a traded unit of Nifty involves 120 shares of M & M i.e.(16,800/140).

6. To calculate the futures price, we need to reduce the cost-of-carry to the extent of dividend received. The amount of dividend received is Rs.1200 i.e.(120 * 10).

The dividend is received 15 days later and hence compounded only for the remainder of 45 days.

To calculate the futures price we need to compute the amount of dividend received per unit of Nifty. Hence we divide the compounded dividend figure by 200.

7. Thus, futures price F = 1200(1.15) 60/365 {120*10(1.15) 45/365 /200} =Rs. 1221.80
hey dear,

Here I am uploading Notes on Pricing futures, so please download and check it.
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