who benefit the most if expected growth rate in dividend for stocks increase?

[h21]

from schewser mock 2 114, the answer is who long future contracts on equity index, why?

 

[carcosa]

As the dividend yield increases, the spot price of the equity index increases. As the spot price increases the futures price increases, holding the continously compounded interest rate constant.
FP(Index) = So x e(RFc-gc)xT

 

[Kelly Z]

An increase in the growth rate in dividends for stocks would increase the spot price of the equity index. As the spot price increases, the futures price for a given maturity also increases.
Thus, an investor who is long a futures contract already can enter into a short futures contract at the same maturity for a higher futures price than his long contract.
Effectively, the investor can buy the asset in the future for a fixed price and sell the asset for a higher fixed price – a guaranteed profit.

 

[h21]

carcosa wrote:
As the dividend yield increases, the spot price of the equity index increases. As the spot price increases the futures price increases, holding the continously compounded interest rate constant.
FP(Index) = So x e(RFc-gc)xT

I think i was confused by why the index would increase if dividend increase?

 

[carcosa]

Because the cash flow is assumed to be reinvested into the index

 

[h21]

carcosa wrote:
Because the cash flow is assumed to be reinvested into the index

i missed that where is that from

 

[carcosa]

To be honest, that was my own interpretation from experience. I do not recall learning that within the curriculum, but that is the only logical explanation as to why the index would increase in value if dividend yield increases. Any other thoughts?

 

[h21]

carcosa wrote:
To be honest, that was my own interpretation from experience. I do not recall learning that within the curriculum, but that is the only logical explanation as to why the index would increase in value if dividend yield increases. Any other thoughts?

so dividend goes up, index goes up, i guess from cf perspective? and call option price goes down

 

[abeshak sindhi]

h21 wrote:

carcosa wrote:
To be honest, that was my own interpretation from experience. I do not recall learning that within the curriculum, but that is the only logical explanation as to why the index would increase in value if dividend yield increases. Any other thoughts?

so dividend goes up, index goes up, i guess from cf perspective? and call option price goes down

Can we use Gordon model to solve this p0=D0(1+g)/r-g so if g increases P0 increases because of which index goes up?