Deutsche Bank
This Document is for institutional use only and not for retail distribution
Dividend derivatives
Dividend derivatives on Indices
Dividend derivatives on single stocks
Amsterdam 26 MAY 2011
Marketing material
Jürgen Schmitt
(+49) 69 910-38434
juergen.schmitt@db.com
Overview
• History + Volume
• Mechanism
• Trading dividends by using standardized contracts
• Motivation and Examples
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
1
History of listed dividend derivates
Additional Asset class derivates on dividends:
June 2008:
2009:
Introduction EuroStoxx 50 ® Index Dividend-Futures
Extented by 4 Blue-Chip-Indices
Eurostoxx ® Select Dividend 30 Index,
DAX ® Kursindex
Divdax ® Kursindex
SMI ®
2010:
Introduction Single-Stock-Dividend-Futures in 2 tranches.
May 2010
Introduction options on SX5E Index Dividend-Futures
October 2010: Introduction 1000er multiplier Single-Stock-Dividend-Futures
SSDivFut cover all SX5E constituents + selected CHF + GBP names
Source: Eurex
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
2
Open Interest SX5E dividend future
Open Interest IndexDivFut
700000
Open Interest IndexDivFut
700000
600000
Open Interest IndexDivFut
600000
500000
700000
500000
400000
Size
600000
Series1
300000
200000
Size
Size
500000
400000
300000
400000
100000
Series1
300000 0
2008
2009
2010
2011
Year
200000
100000
200000
0
2008
2009
2010
Year
100000
0
2008
2009
2010
2011
Year
Source: Eurex
Deutsche Bank
Jürgen Schmitt
(+49) 69 910-38434
3
Open Interest SSDivFut
Source: Eurex
Deutsche Bank
Jürgen Schmitt
(+49) 69 910-38434
4
Current dividend swap market (Notional traded)
V o l u me / U L Y
I ndex FUT
I ndex Opt
SSDF
Source: Eurex
Deutsche Bank
Jürgen Schmitt
(+49) 69 910-38434
5
Mechanics
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
6
Mechanics
How does a dividend-future work ?
Comparable to a divswap
No discounting of payable amount (valuation)
Dividend Fut Buyer
vs
Dividend Fut Seller
= Fix amount payer
payer
vs
Floating amount
= pays agreed dividend
dividend
vs
pays real paid
Deutsche Bank
Jürgen Schmitt
(+49) 69 910-38434
7
Mechanics
Example
11JAN10
Introduction Equity Div Fut from Eurex
06MAY10
ALV GY pays dividend EUR 4.10
03JAN11
Client A buys 50 A2LV=Z1 (Allianz dividend 2011) @ EUR
4.32 at bank B (positive outlook)
24FEB11
ALV GY announced dividend EUR 4.50
05MAY11
ALV GY ex dividend EUR 4.50
Deutsche Bank
Jürgen Schmitt
(+49) 69 910-38434
8
Mechanics
Example
Theory:
Contract worth after ex Dividende EUR 4.50, means
Client A = BUYER = pays strike EUR 4.32 / receives EUR 4.50 real paid div.
-> client realizes EUR 0.18 * 50 contracts * 1000er multiplier = EUR 9000
Practice:
Daily calculation of future settlement price, @ opening inital margin followed by
daily margin. From day ex no more impact, div is fixed (e.g.. ALV GY)
Deutsche Bank
Jürgen Schmitt
(+49) 69 910-38434
9
Trading dividends by using
standardized contracts
Deutsche Bank
Jürgen Schmitt
(+49) 69 910-38434
10
Trading Dividends
Problem:
No standardized possibility to trade dividends
-> another unknown village on trading derivatives on equities (-> price impact,
repo, interest , dividend)
-> trades via OTC to hedge risk / build exposure
(example: Bank A buys 50000 dividends on stock X from client B)
Solution:
Introduction of standardized contracts
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
11
Advantages of standardized contracts
• Alternative OTC-Market (Transparency)
• Valuation and risk transparency
• fixed stock exchange fees
• advantage clearing + settlement
• Collateral / netting
• fast execution via trading-screen (Blocktrade Facility)
• direct counterparty risk mitigated due to CCP
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
12
Contract design
Problem:
So far no unique settlement / reference price -> OTC market different views
regarding maturities and dividend handling
Solution:
Eurex rulebook for standardized contracts www.eurexchange.com
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
13
Contract design / Overview
• maturity :DEC/DEC expiry (vs annual)
• adjusting CA (e.g. capital increase / special div)
• general dividend handling:
INCLUDED
NOT INCLUDED
- regular divs paid during
- special divs
calendar year (100%)
- bonus
- divs from treasury share
- divs from new shares
(BBVA/GASI)
(CRDI/ISP)
- scrip divs: cash value
FX dividends (e.g. USD) – converted regarding rulebook
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
14
Contract design
Dividend handling
Example RWE in
SX5E
Example:
RWE (RWE GY) ex 21apr11 EUR 3.50 / shares per index 0.736 = 2.58 divpts
Shrs/index = (total shares * freefloat / divisor) according to the index provider
Source:
Eurex
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
15
OTC (Block Trade Facility)
• cost efficient
• minimize counterpartyrisk (CCP)
• minimum size 1 lot
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
16
Motivation & Examples
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
17
Motivation
• demand to seperate dividend stream
• trading dividends on stand-alone-basis
• increase/ decrease dividend exposure
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
18
Example DAI
Motivation – example.:
DAI GY – portfolio long 50000 shares
Development of dividend
DATE ex
DIV
last cum
DATE
05APR2007
EUR 1.50
61.10
04APR07
10APR2008
EUR 2.00
52.60
09APR08
09APR2009
EUR 0.60
24.39
08APR09
15APR2010
no payment
36.67
14APR10
14APR2011
EUR 1.85
48.60
14APR11
APR2012
2.25 BBG forecast
Eurex 2.05 / 2.40 (as of 29mar11)
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
YIELD
2.45%
3.80%
2.46%
-3.81 %
19
DAI GY dividends
Deutsche Bank
Example
Jürgen Schmitt
(+49) 69 910-38434
20
Source: Bloomberg
Example DAI
Deutsche Bank
Jürgen Schmitt
(+49) 69 910-38434
Source: Bloomberg
21
Example DAI
e.g. SELL 50 D2AI=Z2 (DAI GY, 1000er multiplier, DEC12), market level 2.05
(bid)
 dividend traded separately, stock performance detached from dividend
 reduction divrisk, max pnl 50 * 1000 * 2.05 EUR = EUR 102500 if omitted
 dividend < EUR 2.05 then receiving difference
Reduces risk that dividend will be cutted /change of dividend policy
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
22
Example DAI
e.g. 50 D2AI=Z2 (DAI GY, 1000er multiplier, DEC12), market level 2.40 (offer)
 separate dividend position
 building exposure -> if DIV > EUR 2.40 = additional earnings, receiving
difference between paid dividend – inital entry level
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
23
Motivation – Portfoliocheck 1
Example: Long 100 FWDS (100er multiplier) BAS GY DEC12
current Divfut-market Eurex 2.16 / 2.34
Risk of higher dividend (2012) = lower FWD
e.g. FWD traded with Div 2.40
Hedge with B2AS=Z2 DivFut, BUY 10 lots @ 2.20 (Limit)
Long FWD -> RISK of higher Divs -> Hedge: BUY DIVFUT
Short FWD -> RISK of lower Divs -> Hedge: SELL DIVFUT
Deutsche Bank
Jürgen Schmitt
(+49) 69 910-38434
24
Motivation – Portfoliocheck 2
Example: Price Return Swap EUROSTOXX 50
PriceReturn Swap: Risk on spread which has been agreed upfront
Long ULY: receiving fixed payment (IR minus spread) vs cpty
receiving divs (unknown amount) on hedge
-> Risk of lower divs -> hedge -> SELL Dividend-futures
TR-Swap: no dividend risk = pass-through of dividends
Deutsche Bank
Jürgen Schmitt
(+49) 69 910-38434
25
Motivation – Portfoliocheck 3
Example: Long DIVSWAP 2012 BAS GY against Bank X – 10000 Divs
bought @ EUR 2.00
Current market EUREX
2.16 / 2.34
Cpty will not unwind swap
-> Hedge via EUREX: Sell 10 B2AS=Z2 e.g. Limit 2.30
(Hedge exposure exactly = regarding current D/f
e.g IR 1YR = 5% -> 1/1+r -> 1/1.05 = D/f 0.952381)
Deutsche Bank
Jürgen Schmitt
(+49) 69 910-38434
26
Motivation – Portfoliocheck 4
Dividendexposure of a portfolio
- Analysis of the div-yield
- Analysis risk in case of change of 10bp of divyield
Whats the Nu-Risk = Change of yield by 10bp on existing div-exposure
Example:
Deutsche Bank
Div-exposure long 1mio EUR SX5E 2012
Index 2950, divs forecast 124.00
(yield 4.2%)
Nu = 0.001 / (124/2950) * 1000000
Nu = 23790
Loss of 23790 EUR if yield drops by 10bp
Jürgen Schmitt
(+49) 69 910-38434
27
Important information
The financial instruments discussed in this document may not be suitable for all investors and
investors must make their own informed investment decisions. Stock transactions can lead to
losses as a result of price fluctuations and other factors. If a financial instrument is
denominated in a currency other than an investor’s currency, a change in exchange rates may
adversely affect the investment. Past performance is not necessarily indicative of future
results.
Derivative transactions involve numerous risks including, among others, market, counterparty
default and illiquidity risk. The appropriateness or otherwise of these products for use by
investors is dependent on the investors' own circumstances including their tax position, their
regulatory environment and the nature of their other assets and liabilities and as such
investors should take expert legal and financial advice before entering into any transaction
similar to or inspired by the contents of this publication. Trading in options involves risk and is
not suitable for all investors. Prior to buying or selling an option investors must review the
"Characteristics and Risks of Standardized Options," at
http://www.theocc.com/components/docs/riskstoc.pdf If you are unable to access the website
please contact Deutsche Bank AG at +1 (212) 250-7994, for a copy of this important document.
The risk of loss in futures trading, foreign or domestic, can be substantial. As a result of the high
degree of leverage obtainable in futures trading, losses may be incurred that are greater than
the amount of funds initially deposited.
Deutsche Bank
Jürgen Schmitt
(+49) 69 910-38434
28
Contact
Jürgen Schmitt
Deutsche Bank AG
Juergen.Schmitt@db.com
+49 69 910 38434
Deutsche Bank
Jürgen Schmitt
(+49) 69 910-38434
29
Disclaimer
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively “Deutsche Bank”). The information herein is believed to
be reliable and has been obtained from public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such
information.
Deutsche Bank may (1) engage in securities transactions in a manner inconsistent with this research report, (2) with respect to securities covered by this report, sell to or
buy from customers on a principal basis, and (3) consider this report in deciding to trade on a proprietary basis.
Opinions, estimates and projections in this report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinions of
Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in
the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to
change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to
participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analysts judgement.
The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transactions
can lead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor’s currency, a change in
exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results.
Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products
for use by investors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and
liabilities and as such investors should take expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this publication.
Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized
Options," at http://www.theocc.com/components/docs/riskstoc.pdf If you are unable to access the website please contact Deutsche Bank AG at +1 (212) 250-7994, for a
copy of this important document.
The risk of loss in futures trading, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures trading, losses may be incurred
that are greater than the amount of funds initially deposited.
Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor’s home jurisdiction. In the U.S. this report is
approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated
by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of
the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorized by the BaFin. This report is
distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore
Branch. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of
investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and
consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany
(Branch Register Number in South Africa: 1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this report is
available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please
cite source when quoting. Copyright © 2010 Deutsche Bank AG
Deutsche Bank
08/04/2015 06:07:49
Jürgen Schmitt
(+49) 69 910-38434
2010 DB Blue template
30