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On the impact of a scrip dividend on an equity forward

Author

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  • German Bernhart

    (Technische Universität München, Parkring 11, 85748 Garching-Hochbrück, Germany)

  • Jan-Frederik Mai

    (XAIA Investment GmbH, Sonnenstraße 19, 80331 München, Germany)

Abstract

We consider an equity forward contract on a stock which pays a dividend during the forward’s lifetime. Furthermore, the stock owner is assumed to have the right to opt for either cash or scrip dividend. In the latter case, the stock owner receives the dividend in the form of additional shares and the number of shares to be received depends on the average stock price in a certain averaging time period. The decision between scrip or cash must be made by the stock owner at some time point during the averaging period. Within a Black–Scholes-type setup we derive a closed formula for the fair strike price of such an equity forward contract in dependence on the stock volatility parameter. If the decision between scrip or cash can be delayed until close to the end of the averaging period, it is demonstrated how the optionality for the stock owner has a non-negligible value which lowers the forward equity strike.

Suggested Citation

  • German Bernhart & Jan-Frederik Mai, 2016. "On the impact of a scrip dividend on an equity forward," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(04), pages 1-16, December.
    • Handle: RePEc:wsi:ijfexx:v:03:y:2016:i:04:n:s2424786316500249
    DOI: 10.1142/S2424786316500249
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    References listed on IDEAS

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