In a fortnight a new product will see the light of day on the Amsterdam derivative markets. The AEX dividend futures will start trading on May 3rd. This opens possibilities for getting exposure to yearly annual dividends in the AEX index, or to hedge your long term dividend risks. If the futures will turn out to be a success, that is. The future market isn’t always the brightest spot on the financial market in Amsterdam, but on the other hand the long term options are fairly liquid compared to the neighbours. It’s a challenge to write about this subject avoiding specialist jargon and slang. Curious readers with a regular job in the normal world will eventually lose track in this post, sorry.

index dividend futures

Euronext is introducing the AEX Dividend Index, accumulating the dividends of each constituent of the AEX index over a certain year. This index starts at zero after the December expiration, and will be reset one year later. This way the separate yearly dividends will be open for trading, so the dec’13 dividend future will only represent the dividends declared in 2013. The contract size is 200 euro per future point – just like normal futures on the AEX. Initial lifetimes of five years.
Regular investors in the CAC40 dividend futures were told a few months ago that the dividends are an asset class in their own right, having low correlation with other asset classes. That’s a difficult one. I seriously doubt the low correlation. The reason for any regular investor to buy or sell indexdividends isn’t very obvious.

Dividend futures elsewhere in Europe

The Amsterdam derivative exchange has a history of being the first with financial innovations in Europe. The first option exchange, the first long term options and the first liquid market in daily and weekly options. With the index dividend futures it has been playing catch up, as the Frankfurt and London have dividend futures for quite some time now. It has been a big success for the Eurostoxx, and even the tiny Swiss Market Index has seen some daily turnover in those dividend futures. The dividend futures on the FTSE 100 have been a tremendous success as well since their inception in May 2009.
Even the DAX index has seen the introduction of dividend futures, failing miserably as the DAX index doesn’t take dividends into account. And there isn’t much option position to hedge with a total return index..

Risk and opportunity for option market

It remains to be seen whether or not the AEX dividend futures will gain some liquidity. It definitely has the potential to change the market in the long term index options. Speculating on dividend changes with synthetics and jelly rolls in the options market is looking a little clumsy compared to straightforward dividend futures. Difficult to predict whether these dividend futures will increase turnover in long term options (better possibilities to hedge positions), or maybe even reduce the volume in the long term series.

Vacancies for the primary market makers in the AEX dividend futures are open. Allowed spread for each of the five yearly maturities is just 1 index point with a minimum quotesize of 100 lots. That is the same as quoting AEX long term jelly rolls with the size of 200 options and one euro spread. The current prof market for long term dividends isn’t quoted at such tight spreads – but interest risk is responsible for that as well.