Dividend Swaps

A dividend swap is an OTC derivative on an index or a stock and involves two counterparties who exchange CFs based on the dividends paid by the index/stock/basket of stocks. In the first of the two legs a fixed payment is made (long the swap), and in the second leg the actual dividends of the index or the stock are paid (short the swap). The dividend swap is a simple and price effective tool for investors to speculate on future dividends directly, and it can also serve as a vehicle for traders holding portfolios of stocks to hedge dividend risk. The liquidity of such swaps has increased in recent years for both these reasons. 

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