All else the same, a decrease in the dividend yield of a stock index will _________ the price of a futures contract in the index.
A) increase
B) decrease
C) not change
D) Void the contract. This materially changes the underlying index.
E) None of the above.

Question

Quizplus · Accepted Answer

A decrease in the dividend yield of a stock index would generally lead to an increase in the price of a futures contract in the index. This is because lower dividends imply that more of the return from holding stocks is expected to come from capital gains rather than dividend income, making the index more valuable and thus increasing futures prices.

All Else the Same, a Decrease in the Dividend Yield