Dividend Swaps and Futures

Dividend swaps and dividend futures come up when managing the variation in dividends. Banks use them to manage the dividend risk they hold in structured products, holders of share portfolios to hedge dividends, and hedge funds to take on dividend exposure¹².

Exchanging realized dividends for a fixed dividend rate

A dividend swap is an over-the-counter derivative on the dividends of a stock or stock index. The buyer receives, at maturity, the dividends actually paid over an agreed period, and pays a fixed dividend rate in return. The fixed dividend rate is set at inception so that the swap has zero value to the buyer³.

In the over-the-counter market, dividend swaps in which the floating side pays realized dividends have been traded since 2001. Variations include dividend swaps with a knock-out, dividend yield swaps, and options on dividend swaps⁴.

A trade that exchanges the whole return of a stock, dividends included, for an interest rate is covered in Equity Swaps and Total Return Swaps. A dividend swap differs in that it isolates the dividends.

Receipts and dividend hedging in a hypothetical example

Consider a hypothetical example in which N Co. holds a stock portfolio worth 500 million yen and hedges the dividends of the next year with a dividend swap. The reference stock index (the N index) has no connection to N Co. and stands at 1,000 points. The market expects the next year's dividends, converted to index points (the N dividend index), to be 20 points, or 2% of the index. Assume the dividends on the portfolio move in the same proportion as the index. With a dividend yield of 2%, the dividends are 10 million yen, so 1 point of the N dividend index corresponds to 0.5 million yen.

N Co. is the seller: it receives the fixed dividend rate of 20 points and pays the realized dividends. The counterparty is a dealer, the buyer. If the realized dividends at maturity are 24 points, for example, N Co. pays 12 million yen for 24 points and receives 10 million yen for 20 points.

The realized dividends are paid as the points of the N dividend index times 0.5 million yen per point. The profit or loss is the same if only the difference is paid.

The swap gain or loss is (fixed dividend rate of 20 − realized dividends) × 0.5 million yen.

Figure description

The gain or loss at maturity of N Co., the seller that receives the fixed dividend rate, in points of the N dividend index. It is a downward-sloping straight line that falls by the same amount for each point that dividends rise. It is zero at the realized dividends equal to the fixed dividend rate, a gain below that, and a loss above it. Dividends cannot fall below 0, so the gain has an upper limit, while the loss has none.

N Co. receives 10 million yen however dividends turn out. The loss is smaller when dividends fall, but N Co. gives up the upside when dividends rise. Nothing guarantees that the dividends on the example portfolio move in the same proportion as the index, and in a real trade N Co. keeps the part that does not match.

The dealer or investor on the other side gains if dividends exceed expectations and loses if they fall short. In this example, the buyer gains 2 million yen if dividends are 24 points and loses 5 million yen if they are 10 points. Dividends cannot fall below 0, so the buyer's loss is at most 10 million yen, the amount at a dividend of 0.

An index of dividends traded on an exchange

A dividend future is a futures contract on an index of dividends, traded on an exchange. The Nikkei 225 Dividend Index adds up the dividends you would receive from holding the constituents of the Nikkei Stock Average from January to December of each year, adjusted to the level of the Nikkei Stock Average. Buying a dividend future lets you invest in the dividend part alone, regardless of gains and losses on the share price².

In Europe, Eurex listed the first dividend future in 2008, and the EURO STOXX 50 dividend future became the market benchmark¹. Futures on the FTSE 100 and the Nikkei Stock Average followed⁴. Nikkei 225 Dividend Index Futures on the Osaka Exchange began trading on July 26, 2010⁵ and were listed as of October 4, 2026⁶.

The Eurex items are from the February 2024 factsheet⁷, and the Osaka Exchange items are from the contract specifications updated in November 2024⁵. The daily mark-to-market for dividend swaps is based on the model description by Filipović and Willems³.

Exchange-traded products offer standardized terms, protection from counterparty risk through a central counterparty (CCP), and margin offsets against other equity and index derivatives⁸. Eurex also has options on dividend index futures⁷.

Deep diveThe price difference between dividend swaps and dividend futures

A dividend future is a futures contract marked to market daily, and its price is the risk-neutral expectation of realized dividends. A dividend swap, in the model, has no mark-to-market and is paid in one amount at maturity. The two prices are therefore not necessarily equal. Filipović and Willems give the fixed dividend rate $D^{fwd}$ of a dividend swap over the period $[T_1, T_2]$ as its difference from the futures price $D^{fut}$, as follows³.

$$D^{fwd}(t, T_1, T_2) = D^{fut}(t, T_1, T_2) + \frac{\mathrm{Cov}_t\left[\zeta_{T_2},\, C_{T_2} - C_{T_1}\right]}{P(t, T_2)\,\zeta_t}$$

$\zeta_t$ is the risk-neutral discount factor at time $t$, $C_t$ is the dividends accumulated up to time $t$, $P(t, T_2)$ is the price of a zero-coupon bond maturing at $T_2$, and $\mathrm{Cov}_t$ is the covariance given the information at time $t$. If interest rates and dividends are independent, the covariance is 0 and the two prices are equal. With positive dependence between interest rates and dividends, the swap price is lower than the futures price, and with negative dependence it is higher.

Reading expected dividends from prices

The price of a dividend future reflects the dividends the market expects. Comparing it with a stock index gives a rough measure of the expected dividend yield². Consider a hypothetical example in which the N index is at 1,000 points. If the N dividend index future is priced at 20 points, the market's expected dividend yield is 2% (= 20 ÷ 1,000).

Dividends can also be read from the price of a stock index future. The Osaka Exchange gives the following formula for the theoretical price of Nikkei 225 Futures⁹. $F$ is the theoretical price, $S$ is the stock index, $r$ is the interest rate, $\delta$ is the expected dividend yield, and $T$ is the number of days to maturity divided by 365, in years.

$$F = S\,e^{(r-\delta)T}$$

Solving this for $\delta$ gives the following.

$$\delta = r - \frac{1}{T}\ln\frac{F}{S}$$

This is a simple form that holds the interest rate and the expected dividend yield $\delta$ constant over the period.

If the N index is at 1,000 points, the interest rate is 1%, and the index future maturing in one year is priced at 990 points, then $\delta = 0.01 - \ln(0.99) = 0.0200$, so the expected dividend yield is about 2%. The theoretical price of an equity index future is higher by the interest rate and lower by the dividends.

From option prices, the present value of dividends can be read through put-call parity. Take European options with the same strike and maturity on an underlying that pays dividends before maturity. The difference between the price $C$ of the call and the price $P$ of the put is given by the following formula¹⁰. $K$ is the strike and $DF$ is the discount factor to maturity.

$$C - P = S - \text{PV of dividends} - K \times DF$$

Suppose the N index is at 1,000 points, the strike is 1,000 points, the maturity is one year, the discount factor is 0.99, the call is 40 points, and the put is 50 points. Then the present value of dividends is 1,000 − 990 − (40 − 50) = 20 points, or 2% of the index.

A dividend future shows the expected dividends directly, but from futures and options you back out dividends by assuming an interest rate. As the formulas show, changing the assumed interest rate changes the dividends you read. Where interest rates or dividend yields are not constant, the dividends backed out can differ from the actual expectation.

The risk of dividend cuts and cancellations

Dividends are decided by companies, so the dividends you receive over a year can change until the company fixes the amount². Cuts and cancellations move the price of dividend futures.

In 2020, many companies cancelled dividends they had already announced because of the COVID-19 pandemic. Restrictions imposed by the European Central Bank (ECB) on European banks also stopped bank dividend payments until partway through 2021. At that time, the near-dated EURO STOXX 50 dividend future fell from about 120 in normal times to a low of 50¹¹.

After this experience, Eurex added semiannual expiries for indices and quarterly expiries for single stocks, to allow finer hedging of near-term dividends¹¹.

A buyer who bought when prices were low can also profit. In an example Eurex gives from 2009, there was an opportunity to buy the 2010 EURO STOXX 50 dividend future at 50 points in March 2009 and have it settle at 115 points about a year later¹². A buyer in that opportunity gains 65 points, and a seller loses 65 points.

Conversely, if a company cuts its dividend after you buy, and realized dividends end up below the price you paid, the buyer can lose. Consider a hypothetical example in which a buyer buys at 120 points and realized dividends are 50 points. The buyer loses 70 points (these values differ from the 2009 buyer's example in the source).

For someone who receives dividends, a dividend cut means lower receipts. If that holder is also the seller of a dividend swap, like N Co. in the example, the swap gain offsets the fall in dividends.

Dealers' hedging sales in structured products and the price of dividend futures

The dividend swap market grew at first out of banks' need to manage the dividends they hold in structured products¹. In the dividend futures market, structured product desks are the main source of supply¹³. Issuers of structured products have sold dividend futures to hedge dividend risk when markets fall, which has deepened the price declines¹⁴.

Because of this selling, the price of a dividend future is not set by companies' dividend outlook alone. In the Eurex material, a Eurex representative says that many companies prefer stable dividends and hesitate to cut them even in a bad year, but that this does not always show up in the price of dividend futures. The reason is the selling described in the previous paragraph¹⁵. A Citi representative also says that dividend forecasts can be built from analysis of a company's earnings and cash flow and from dialogue with the company¹⁶.

After the turmoil of 2020, decrement indices, which are calculated by subtracting a fixed amount of dividends, became widely used as references for structured products in Europe, and issuers needed to sell fewer dividend futures¹³. The mechanism of structured products is covered in Overview of Exotic Equity Products.

Notes

1. Eurex, "Dividend derivatives look to the future" (2022), page 2. The source covers how the dividend swap market grew and Eurex's listing of the first dividend future in 2008. ↩ ↩² ↩³

2. Osaka Exchange, "日経平均・配当指数先物 商品概要" (Nikkei 225 Dividend Index Futures: product overview, our translation; in Japanese). The source covers the definition of the dividend index, dividend hedging, investing in dividends alone, and the rough measure of the expected dividend yield (2% for a Nikkei Stock Average of 10,000 yen and a dividend index future of 200 yen). ↩ ↩² ↩³ ↩⁴

3. Damir Filipović and Sander Willems, "A Term Structure Model for Dividends and Interest Rates" (arXiv:1803.02249 v3), section 6.2 "Dividend forwards" (page 20). The source covers how the fixed payment is set, the absence of daily mark-to-market, and the formula for the difference from the futures price. The subscripts of D (fwd, fut) are the notation used in this text. ↩ ↩² ↩³

4. Filipović and Willems, same paper, chapter 1 (pages 1 to 2). The source covers over-the-counter trading since 2001, the variations, and Eurex's listing in late 2008 followed by FTSE 100 and Nikkei Stock Average futures. ↩ ↩²

5. Osaka Exchange, "日経平均・配当指数先物 制度概要" (Nikkei 225 Dividend Index Futures: contract specifications, our translation; in Japanese; updated November 4, 2024). The source covers the trading unit, expiries (8 years and 3 months; 9 expiries from January to March), last trading day, settlement method, and final settlement price. ↩ ↩²

6. Japan Exchange Group, "商品一覧（先物・オプション）" (List of products: futures and options, our translation; in Japanese), "配当指数" (Dividend index), "日経平均・配当指数先物" (Nikkei 225 Dividend Index Futures), checked on October 4, 2026. ↩

7. Eurex, "Dividend Derivatives" factsheet (February 2024), page 2, "Contract specifications 1". The source covers the contract value, expiries, settlement, and last trading day, and the Mid-Curve Options in the same table. ↩ ↩²

8. Eurex, "Dividend Derivatives" factsheet, page 1, "Hedge dividend risk" and "What are the key benefits?". The source lists the benefits of exchange-traded products. ↩

9. Osaka Exchange, "先物取引のすべて" (All about futures trading, our translation; in Japanese), page 42 (PDF page 45), "裁定取引の具体例" (Specific examples of arbitrage), "①日経225先物の理論価格" ((1) Theoretical price of Nikkei 225 Futures). The symbols are the same as in the source, with t written as T in the text. ↩

10. The Ohio State University, "Derivatives and Their Portfolios, Put-Call Parity," "Put-call Parity" and "Versions of Put-Call" (pages 1 to 2). The source gives the formula for discrete dividends. ↩

11. Eurex, "Dividend derivatives look to the future" page 2. The source covers the dividend cancellations and ECB restrictions, the fall in the near-dated future from about 120 to 50 according to a Eurex representative, and the added expiries. ↩ ↩²

12. Eurex, "Dividend derivatives look to the future" page 4. The source gives an opportunity to buy the 2010 future at 50 points and have it settle at 115 points a year later. ↩

13. Eurex, "Dividend derivatives look to the future" pages 5 to 6. The source covers structured products as the central supply source, how a decrement index is calculated, and the fall in the need to sell dividend futures. ↩ ↩²

14. Eurex, "Dividend derivatives look to the future" pages 3 and 8. Issuers of structured products have sold dividend futures to hedge when markets fall, which has deepened the price declines. ↩

15. Eurex, "Dividend derivatives look to the future" page 9. In a statement by Paul Beck of Eurex, the source gives the reason why companies' preference for stable dividends does not always show up in the price of dividend futures. ↩

16. Eurex, "Dividend derivatives look to the future" page 9. In the summary of a statement by Antoine Porcheret of Citi, the source describes how a dividend forecast is built. ↩