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Equity derivatives: Swapping dates earns dividends

Dividend swaps market soars as investors profit.

EuroStoxx50 dividends, year-on-year percentage change
Implied by swap market and IBES consensus
IBES consensus Y/Y Swap Y/Y
2007 17.38
2008 10.34 6.17
2009 10.25 4.68
2010 8.04 1.77
2011 7.81 1.29
2012 7.24 0.9
2013 0.89
2014 0.88
2015 0.87
2016 0.79
Source: IBES/Barclays Capital

Dividend swaps have become one of the biggest money-spinners for investors using volatility arbitrage and long/short equity strategies, earning many hundreds of millions of dollars, say equity derivative bankers.

The growth in dividend payouts has been a key factor but dividend swap volumes have also been boosted by investors using them as a proxy inflation hedge.

Dividend options, a relatively new product, have yet to take off, but bankers expect volumes to grow as the market develops.

"The growth in dividend payouts in recent years has been phenomenal," says Dixit Joshi, managing director at Barclays Capital. "In some indices, dividend yields are multiples of what they were a few years ago, as companies that have built up big cash reserves seek to return some of that to shareholders."

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