InvestorQ : Can you tell me how the dividend of Coal India is going to be adjusted in the F&O contracts? Does it need adjustment in the first place?
Niti Shenoi made post

Can you tell me how the dividend of Coal India is going to be adjusted in the F&O contracts? Does it need adjustment in the first place?

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ishika Banerjee answered.
2 weeks ago
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At its AGM on 07th November 2022, board of directors of Coal India approved an Interim Dividend of Rs 15/- per equity share. For this dividend payout, the record date has been set as November 16th, 2022. So, any investor seeking interim dividend must have shares in the demat account by the close of 16th November 2022. So shares have to be purchased by T-2 date or by 14th November. That means, 14th November will be the last cum-dividend date and on 15th November the stock of Coal India goes ex-dividend. Normally, price adjustment for any corporate action happens on the ex-date.

Before adjusting dividends there is a small question to ask. Is the dividend so declared an ordinary dividend or an extraordinary dividend? Now if dividend declared is below 2% of the market value of the stock, it is ordinary dividends. In such cases, no adjustments have to be made in F&O. However, if the dividend is more than 2% of the market value, adjustment is made to the strike price of the F&O contract. In case of Coal India, relevant price was Rs249.50 and dividend of Rs15 per share which is 6.01%. as it is more than 2%, it is classified as extraordinary dividend, requiring F&O adjustment. Meeting date is considered for price.

Now that we know this is an extraordinary dividend, adjustment has to be made in F&O contracts. Here is how the adjustment is made.

a) For stock futures contracts on Coal India, the base price of the Futures contracts on November 14th, 2022 will be the reference rate less the dividend of Rs15 per share. The reference rate will be the daily MTM (mark to market) settlement price.

b) In the case of options contract, the dividend of Rs15/- per share will be deducted from all the cum-dividend strike prices on the ex-dividend date. So strike price of Rs260 becomes Rs245 and strike price of Rs270 becomes Rs255 and so on.

c) Such adjustment for corporate actions will be implemented on the last day on which a security is traded on cum-basis in equities market, but after the close of trading hours.

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