Forward with cash dividends
Definition · Level 11 · Pricing toolkit
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When dividends are known amounts, take their present value off spot before adding the carry: F = (S − PV(D)) × e^(rT).
Example
S = 80, r = 5%, a 2.00 dividend in 6 months, 1 year → F = (80 − 1.95) × e^0.05 = 82.05.
Where Tradecraft teaches it
Level 11 · Pricing toolkit, in the lesson “Forwards: pricing by the cost of carry”: A forward price is today’s price plus the cost of carrying the asset to delivery: interest, dividends and borrow fees.
Related terms
- Forward priceThe price fixed today for delivery at a later date, set by what it costs to buy and hold the asset until then, not by a forecast.
- Futures convexity adjustmentThe gap between a futures price and the matching forward, caused by daily margining when the underlying moves with rates.
- Implied dividendThe dividend level backed out of futures or put–call parity quotes: what the market prices, which can differ from analysts’ forecasts.
- 0.4 ruleAt-the-money-forward call or put ≈ 0.4 × S × σ × √T (small dividends, modest σ√T), because 1/√(2π) ≈ 0.4.
- Arbitrage boundsPrice limits any option must respect, or someone locks in a riskless profit: call ≤ S, European put ≤ K·e^(−rT), call ≥ max(0, S − K·e^(−rT))…
- Backward induction (pricing tree)Solving a problem from the last step back to the first.