It is important to note the effect of dividends in equity forward contracts. Any equity portfolio nearly always has at least a few stocks that pay dividends, and it is inconceivable that any well-known equity index would not have some component stocks that pay dividends. Equity forward contracts typically have payoffs based only on the price of the equity, value of the portfolio, or level of the index. They do not ordinarily pay off any dividends paid by the component stocks. An exception, however, is that some equity forwards on stock indices are based on total return indices. For example, there are two versions of the well-known S&P 500 Index. One represents only the market value of the stocks. The other, called the S&P 500 Total Return Index, is structured so that daily dividends paid by the stocks are reinvested in additional units of the index, as though it were a portfolio. In this manner, the rate of return on the index, and the payoff of any forward contract based on it, reflects the payment and reinvestment of dividends into the underlying index. Although this feature might appear attractive, it is not necessarily of much importance in risk management problems. The variability of prices is so much greater than the variability of dividends that managing price risk is considered much more important than worrying about the uncertainty of dividends. In summary, equity forwards can be based on individual stocks, specific stock portfolios, or stock indices. Moreover, these underlying equities often pay dividends, which can affect forward contracts on equities. Let us now look at bond and interest rate forward contracts.