Deutsche Bank This Document is for institutional use only and not for retail distribution 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 18/03/2018 15: 53: 22 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 Euro. Stoxx 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 SX 5 E Index Dividend-Futures October 2010: Introduction 1000 er multiplier Single-Stock-Dividend-Futures SSDiv. Fut cover all SX 5 E constituents + selected CHF + GBP names Source: Eurex Deutsche Bank 18/03/2018 15: 53: 22 Jürgen Schmitt (+49) 69 910 -38434 2010 DB Blue template 2
Open Interest SX 5 E dividend future Source: Eurex Deutsche Bank Jürgen Schmitt (+49) 69 910 -38434 3
Open Interest SSDiv. Fut Source: Eurex Deutsche Bank Jürgen Schmitt (+49) 69 910 -38434 4
Current dividend swap market (Notional traded) Source: Eurex Deutsche Bank Jürgen Schmitt (+49) 69 910 -38434 5
Mechanics Deutsche Bank 18/03/2018 15: 53: 26 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 vs Floating amount = pays agreed dividend vs pays real paid Deutsche Bank Jürgen Schmitt (+49) 69 910 -38434 7
Mechanics Example 11 JAN 10 Introduction Equity Div Fut from Eurex 06 MAY 10 ALV GY pays dividend EUR 4. 10 03 JAN 11 Client A buys 50 A 2 LV=Z 1 (Allianz dividend 2011) @ EUR 4. 32 at bank B (positive outlook) 24 FEB 11 ALV GY announced dividend EUR 4. 50 05 MAY 11 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 * 1000 er 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 18/03/2018 15: 53: 26 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 18/03/2018 15: 53: 26 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 18/03/2018 15: 53: 27 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 18/03/2018 15: 53: 27 Jürgen Schmitt (+49) 69 910 -38434 2010 DB Blue template 14
Contract design Dividend handling Example RWE in SX 5 E Example: RWE (RWE GY) ex 21 apr 11 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 18/03/2018 15: 53: 27 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 18/03/2018 15: 53: 27 Jürgen Schmitt (+49) 69 910 -38434 2010 DB Blue template 16
Motivation & Examples Deutsche Bank 18/03/2018 15: 53: 27 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 18/03/2018 15: 53: 28 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 05 APR 2007 EUR 1. 50 10 APR 2008 EUR 2. 00 09 APR 2009 EUR 0. 60 15 APR 2010 no payment 14 APR 2011 APR 2012 Deutsche Bank 18/03/2018 15: 53: 28 DATE 04 APR 07 09 APR 08 08 APR 09 14 APR 10 YIELD 2. 45% 3. 80% 2. 46% -- EUR 1. 85 48. 60 14 APR 11 2. 25 BBG forecast Eurex 2. 05 / 2. 40 (as of 29 mar 11) 3. 81 % Jürgen Schmitt (+49) 69 910 -38434 2010 DB Blue template last cum 61. 10 52. 60 24. 39 36. 67 19
DAI GY dividends Deutsche Bank Jürgen Schmitt (+49) 69 910 -38434 Example Source: Bloomberg 20
Example DAI Deutsche Bank Jürgen Schmitt (+49) 69 910 -38434 Source: Bloomberg 21
Example DAI e. g. SELL 50 D 2 AI=Z 2 (DAI GY, 1000 er multiplier, DEC 12), market level 2. 05 (bid) Ø dividend traded separately, stock performance detached from dividend Ø reduction divrisk, max pnl 50 * 1000 * 2. 05 EUR = EUR 102500 if omitted Ø dividend < EUR 2. 05 then receiving difference Reduces risk that dividend will be cutted /change of dividend policy Deutsche Bank 18/03/2018 15: 53: 30 Jürgen Schmitt (+49) 69 910 -38434 2010 DB Blue template 22
Example DAI e. g. 50 D 2 AI=Z 2 (DAI GY, 1000 er multiplier, DEC 12), market level 2. 40 (offer) Ø separate dividend position Ø building exposure -> if DIV > EUR 2. 40 = additional earnings, receiving difference between paid dividend – inital entry level Deutsche Bank 18/03/2018 15: 53: 30 Jürgen Schmitt (+49) 69 910 -38434 2010 DB Blue template 23
Motivation – Portfoliocheck 1 Example: Long 100 FWDS (100 er multiplier) BAS GY DEC 12 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 B 2 AS=Z 2 Div. Fut, 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 Price. Return 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 B 2 AS=Z 2 e. g. Limit 2. 30 (Hedge exposure exactly = regarding current D/f e. g IR 1 YR = 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 10 bp of divyield Whats the Nu-Risk = Change of yield by 10 bp on existing div-exposure Example: Deutsche Bank Div-exposure long 1 mio EUR SX 5 E 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 10 bp 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
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