Corporate actions such as dividends, rights issues, mergers, demergers, stock splits, and bonus issues significantly impact Futures and Options (F&O) contracts. The corporate actions that lead to these adjustments include dividends, bonus, rights issue, mergers, demergers and splits. These adjustments are made the day before the ex-date of the corporate action when the market closes. For instance, if the ex-date for an extraordinary dividend issue of a company were 06th December, the adjustments in all open F&O contracts would be made on 05th December.
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Base Price/Strike Price:
The base price of the futures contract and the strike price of the options contracts will be modified as part of the adjustment process.
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Market Lot / Multiplier:
The market lot or multiplier of the F&O contracts might also undergo changes in response to corporate actions.
To learn more about adjustments in case of corporate actions, visit
nseindia.com/products-services/equity-derivatives-corporate-actions-adjustments
.
Dividends
Dividends
are a portion of the profits or reserves paid by the company to its shareholders. Dividends that fall below 2% of the market value of the underlying stock will be classified as regular dividends, and no changes will be made for such dividends. However, in the case of extraordinary dividends equal to or exceeding 2% of the market value of the underlying security, an adjustment will be made to the strike price.
Example scenario
IOC declared an extraordinary dividend of ₹3
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Dividend
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₹3
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Ex-date
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Jul 28, 2023
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Pre Ex-date
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Jul 27, 2023
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Base price of Futures:
Settlement price of the futures contract on the pre-ex date - Dividend amount.
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Contract
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Settlement Price of pre-ex date
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Dividend amount
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New base price
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IOC23AUGFUT
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99.3
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3
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96.3
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IOC23SEPFUT
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100.1
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3
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97.1
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Strike price of Options:
Old strike price - Dividend amount.
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Old strike
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Dividend amount
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New strike (110-3)
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IOC23AUG110CE
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3
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IOC23AUG107CE
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Market Lot / Multiplier:
The market lot or multiplier of the F&O contracts is not modified and remains the same in case of dividend declaration.
Bonus
A
bonus issue
is the distribution of free shares by the company to the existing shareholders. In a bonus issue, the number of shares increases, but the value of the investment remains the same.
Example scenario
Indiamart issued a bonus in the ratio of 1:1
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If the bonus ratio is A:B, then the adjustment factor will be (A+B)/B. In this case, the adjustment factor is (1+1)/1= 2.
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Ex-date
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June 21, 2023
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Pre-ex-date
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June 20, 2023
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Adjustment factor
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2
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Base price of Futures:
Old futures price ÷ Adjustment factor.
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Contract
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Futures price before adjustment
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Adjustment factor
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New futures price
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INDIAMART23JUNFUT
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5969.6
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2
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2984.8
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Strike price of Options:
Old strike price ÷ Adjustment factor. (All the strike prices will be adjusted accordingly)
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Old strike
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Adjustment factor
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New strike (6000/2)
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INDIAMART23JUN6000CE
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2
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INDIAMART23JUN3000CE
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Market Lot / Multiplier:
Old Market Lot * Adjustment Factor.
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Lot size before adjustment
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New lot size (150*2)
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150
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300
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Stock split and Consolidation of shares (Reverse stock split)
A
stock split
is a corporate action in which a company increases the number of its shares by decreasing the face value of the stock. This is usually employed to increase liquidity as the stock's price reduces proportionally after the split. Consequently, the split increases the quantity of shares by reducing the face value, while the overall value of the investment remains unchanged.
Consolidation of shares
is a corporate action where a company reduces the number of outstanding shares by combining the shares and increasing the face value. Consolidation of shares is also known as reverse stock split.
Did you know?
The adjustments to F&O contracts for stock split and reverse stock split (consolidation of stocks) are similar.
Example scenario
Jubilant food works declared a stock split in the ratio of 5:1.
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If the ratio is A: B, then the adjustment factor will be A/B. In this case, the adjustment factor is 5/1 = 5.
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Ex-date
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April19, 2022
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Pre-ex-date
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April 18, 2022
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Adjustment factor
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5
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Base price of futures:
Old futures price ÷ Adjustment factor.
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Contract
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Futures price before adjustment
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Adjustment
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New futures price
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JUBLFOOD22APRFUT
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2863
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5
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572.6
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Strike price of options:
Old strike price ÷ Adjustment factor. (All the strike prices will be adjusted accordingly
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Old strike
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Adjustment factor
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New strike (6000/2)
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JUBLFOOD22MAY3000CE
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5
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JUBLFOOD22MAY600CE
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Market Lot / Multiplier:
Old market lot * Adjustment factor.
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Lot size before adjustment
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New lot size (150*5)
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125
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625
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Rights issue
A
rights issue
is a type of corporate action that enables a company's current shareholders to purchase extra shares in proportion to their existing holdings, generally at a reduced price. Eligible shareholders will receive right entitlements (REs) in their demat accounts, which can be used to apply for the rights issue or traded on the market.
What is a Rights issue?
Example Scenario
Indian hotels declared a rights issue in the ratio of 1:9. The calculation of the adjustment factor is as follows:
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Underlying close price on the last cum date (P) = 215.3.
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Issue price of the rights (S) = 150.
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Rights Entitlement (A) = 1.
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Number of existing shares (B) = 9.
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Total Entitlement is (A+B) = 1+9 = 10.
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Benefit per Right Entitlement (C) = (P-S) x A = (215.3-150) * 1 = 65.3.
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Benefits per share (E) = C / (A+B) = 65.3 / 10 = 6.53.
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Adjustment Factor = (P-E) / P = (215.3-6.53) / 215.3 =
0.96967.
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Ex-date
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November 11, 2021
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Pre-ex-date
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November 10, 2021
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Adjustment factor
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0.969670
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Base price of futures:
Old futures price ÷ Adjustment factor.
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Contract
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Futures price before adjustment
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Adjustment factor
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New futures price
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INDHOTEL21NOVFUT
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220
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0.969670
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213.33
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Strike price of options:
Old strike price * Adjustment factor. (All the strike prices will be adjusted accordingly)
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Old strike
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Adjustment factor
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New strike (210*0.960670)
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INDHOTEL21NOV210PE
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00.969670
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INDIHOTEL21NOV
203.6
PE
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Market Lot / Multiplier:
Old Market Lot / Adjustment Factor.
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Lot size before adjustment
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New lot size ( 3900/0.969670
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3900
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4021.98 = 4022
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The updated strike/futures prices and the adjusted lot size will be displayed in decimal places. The strike/futures prices will be rounded to the nearest tick size, while the lot size will be rounded to the nearest whole number.
Mergers
Merger refers to the process in which two or more companies combine to form a single entity, consolidating their operations, assets, liabilities, and ownership structures. Mergers can take various forms and have different implications for the companies involved, their shareholders, and the market in general.
Example Scenario
Merger of HDFC Ltd. and HDFC Bank:
Futures:
Physical delivery shares of HDFC Ltd. were given/taken at the closing price of the underlying on the merger date, and they will be merged into shares of HDFC Bank on the merger date as per the defined ratio.
Options:
All in-the-money (ITM) options of HDFC expired with a value of zero, and the physical delivery of HDFC shares was executed at the designated strike price. These shares were then integrated into the source company, HDFC Bank.
When mergers occur, there will be no introduction of new F&O contracts. All the current futures and options contracts will be automatically closed at the end of the market hours on the pre-ex date. After this, both the derivative contracts and the underlying assets won't be visible on the following day, which is the ex-date. On the pre-ex date, any positions of HDFC Ltd. that a client still holds and hasn't closed will be settled at the settlement price determined on the pre-ex date for the underlying asset.
Demerger
Demerger, also known as spin-off or divestiture, refers to the process of a company splitting or separating its business divisions, subsidiaries, or assets into distinct independent entities.
In the event of demergers, any open or existing positions (contracts) as of the pre-ex-date (after the market closes) will be automatically closed (expired). New contracts will then be introduced on the ex-date of the underlying asset.
Following the price established after the opening of the market, a minimum of five in-the-money strikes, one at-the-money strike, and five out-of-the-money strikes will be introduced.
Example scenario
Reliance - Jio Financial demerger:
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Options:
All in-the-money options of Reliance will expire with a value of zero, and the physical delivery of shares will occur at the designated strike price.
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Futures:
Physical delivery shares of Reliance will be given/taken at the closing price of the underlying.
