How Dividend Swaps and Futures Differ in Mark-to-Market and Discounting
Summary
The document compares a dividend swap with a dividend future when both provide exposure to dividends through a stated strike or entry price. In the example, a long position entered at 100 gains when the dividend outcome or futures price rises to 102, but the timing of that gain differs: a swap pays the net amount at expiry, while a future’s mark-to-market changes as its price moves and converges to final settlement.
The explanation identifies discounting as the marginal pricing distinction. A swap’s eventual cash flow is discounted because it is received at expiry; the futures position reflects interim gains or losses as they occur. The discussion offers an intuitive comparison rather than a full valuation framework. It does not derive fair prices, quantify funding or collateral effects, or address contract-specific settlement conventions, so its claim that prices are practically similar should be understood as a simplified observation.
Key ideas
- A dividend swap fixes a strike and pays the difference between that strike and realized dividends at expiry.
- A dividend future marks gains and losses to market as its price changes.
- The future converges to its final dividend settlement value.
- Discounting the swap’s delayed payment is the stated marginal difference between the instruments.
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Full text
# Difference between dividend swap and dividend futures # Difference between dividend swap and dividend futures My understanding has been that a dividend swap, like any other type of swap involves pricing a fixed leg ($A$), with some dividend amount per period as the strike, and a variable leg ($B$) with the expected dividend payment as the floating value for each period. We then discount each payment and do $PV = PV_B - PV_A$. The price of a dividend future should just be equal to the discounted expected future dividends up to maturity. I've read now in https://www.trading-volatility.com/Dividend%20Swaps%20and%20Futures%20-%20Colin%20Bennett.pdf that there is no difference between the two and the two have practically the same price. Can someone explain to me how and why a dividend swap and a dividend future should be the same? Is the fixed rate in practice $0$ and therefore we have the same price? ## Answer by Soumirai (score 1, accepted) https://quant.stackexchange.com/a/80395 If you go long dividends via a div swap, you enter at a certain strike (say 100). If divs settle at 102, you make 2 at expiry of the swap. Before that, the fair strike of the swap can change, and your div swap is marked to market to that (as you can take the inverse position and lock in the difference in strikes). If you go long dividends via a div future, you enter the future at a certain price (again 100). Then if the div future price goes to 102, you make 2 immediately. The dividend future price is forced to converge to final dividend settlement because it settles there. The marginal difference between the two, is that in dividend swaps, you are subject to discounting. Because you receive the cash flows only at expiry. So today you make only the Present Value of your 2 points of dividends. Whereas in dividend futures, you make the 2 points of dividends immediately, given you entered the future at 100 and can now exit at 102.
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