A dividend swap is an OTC derivative mostly used by market participants to hedge a
dividend risk in a book. Indeed, dividend risk is an important parameter to fully monitor
when owning long stock or index positions. One of the best way to hedge this risk and
also one of the less costly is to use a dividend swap. Market participant can also use a
dividend swap for speculation purpose or income generation through dividend
payments over a specific period of time.
Dividend Swap Structure:
Dividend Swap
A dividend swap is built as follow:
Fixed Leg = paid by the buyer of the swap
Floating Leg = received by the buyer of the swap
N = notional
The fixed leg of a dividend swap corresponds to the average expected dividends that
will be payout over the swap life. It can be used as a forecast of the expected dividends
on a specific stck
