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Here is a question I encountered:

In 2009, a trader believes that dividends for a stock in 2011 will be lower than expected, what is the best strategy among: long/short 2010 forward, long/short 2011 forward.

For me, if the trader believes the dividends will be lower than expected, it means that equivalently he expects that the stock price will be higher than expected in 2011. The formulation of the problem is not very clear, but I supposed that the 2011 forward contract was after the ex-dividend date of the stock. Therefore, by using the formula for the forward price: \begin{align} F_0 = S_0 e^{(r-q)T} \end{align} The forward in the eyes of the trader is underpriced, and he would long the 2011 forward. Is my reasoning correct?

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Yes, that is correct.

A lower dividend than expected will result in a higher stock price than expected. Hence, you would want to buy/long the stock forward in order to capture this difference at maturity. Furthermore, you should enter into the 2011 contract, since this is when the discrepancy will be realized. Once the market sees a lower dividend yield, the prices will adjust accordingly, and you can pocket your profit.

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In reality, there are two reasons why the dividend yield goes down: 1) growth prospects are so good, companies would prefer to use the cash to invest organically in the company or through acquisitions or 2) the dividend rate becomes unsustainable (generally implying companies' cash flow is falling and equities fall). For 1), the company would generally prefer to raise debt. So, without any further information on the analyst's expectation of stock prices, to JUST capture his view that dividends will be lower, he would long the 2011 contract and short the 2010 contract. When the 2010 contract comes due, he would maintain his short in the equity against his long 2011 futures contract.

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