Tuesday, August 25, 2015

options - Implied dividend estimation



I am looking at two different ways of estimating the expected / implied dividends from market data.


1. Dividend futures


I know that this asset class is not very liquid and might not be representative enough. However, assuming that I have prices which are good enough, how could I estimate the implied divided from the contract price?


For instance, if I have an exchange traded contract whose settlement is the sum of actual dividends paid during 2013, could I just take the current contract price and capitalize it up to the settlement date in order to obtain the implied dividend for 2013?


EDIT: Example added for illustration purposes:


On 05 july 2013, the quoted prices for Santander Dividend Futures are:



  • 2013 contract; Maturity 20 Dec 2013; Price: 0.58

  • 2014 contract; Maturity 19 Dec 2014; Price: 0.41

  • 2015 contract; Maturity 18 Dec 2015; Price: 0.32



For simplicity assume that:



  • Each contract is linked to the sum of all dividends paid during the corresponding calendar year.

  • Appropriate risk free rates for each contract are: 0,1%; 0,3%; 0,5%.


If I want to estimate the total amount of implied dividends for each year, could these figures be obtained as:


D2013=0.58e(0,0010.46)=0.5802

D2014=0.41e(0,0031.46)=0.4118
D2015=0.32e(0,0052.45)=0.3240
Or am I missing something?


2. Index / single-stock futures


Alternatively, if I wanted to estimate the dividend yield for a stock, what are the limitations of calculating the implied yield directly from the market prices as:



F=S0e(rq)Tq=rTlnFS0T


I guess there must be certain shortcomings with this aprroach, since usually the synthetic forward is obtained through the put-call parity instead of using the futures prices.


Thanks in advance!




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