Increased correlation with equities poses dividend dilemma

Dividend structures such as reverse convertibles and autocallables have seen demand take a big hit amid the decline in equity markets. With fewer of these products being sold, long dividend exposure is now well below the risk appetite of most banks. Magda Ali reports

As a result of the de-risking that occurred after the Flash Crash in May last year, the movement in short-dated dividends showed a stark overreaction to the sell-off in equities. The meltdown was so severe that the price of dividend futures fell 11–14% in a single day, while the Eurostoxx 50 index was down only 4–5%. Though trading in dividends has largely stabilised, dealers are now worried about remaining within internal risk limits.

Estimates on the shape of the dividends future curve over