InvestorQ : Can you tell me how the futures and options contracts of BEL would got adjusted for the bonus issue?
Mahima Roy made post

Can you tell me how the futures and options contracts of BEL would got adjusted for the bonus issue?

2 weeks ago

Here is what you need to know about the F&O adjustment of the contracts of Bharat Electronics Ltd (BEL) on account of the bonus issue.

a) BEL had announced 2:1 bonus via capitalization of free reserves with record date of 16th September. That means the last cum-bonus date for bonus eligibility was 14th September, so as to get delivery by 16th September.

b) The ex-date for the 2:1 bonus issue of BEL was the 15th September. What does this bonus of 2:1 entail. The bonus is 2 shares for every 1 share held, so the adjustment factor is 3. In, short, the number of shares held will increase 3-fold.

c) In other words, investor who is holding on to 100 shares prior to the bonus issue will end up holding 300 shares of BEL post the bonus. That is due to getting 200 bonus shares on 100 shares of BEL held by the investor.

· Let us first turn to the adjustment of the futures contracts due to the bonus issue. There will be an impact on the number of contracts and the contract price. The adjustment will be done by multiplying number of contracts in the pre-adjusted position by the adjustment factor of 3. Thus 1 lot becomes 3 lots.

· The adjusted price will be determined by dividing the pre-adjustment price by 3. Here is an illustration. If you are long on 1 lot of BEL Futures (comprising of 3,800 shares) at a price of Rs270, post bonus you will be long on 3 lots of BEL futures (11,400 shares) at an average price of Rs90.

· Let us now turn to how the options contracts of BEL would be adjusted. Here again there will be the adjustment to the contract size and to the strike price. Firstly, the strike price is adjusted by dividing the old strike price by the adjustment factor of 3. Then, adjusted positions in options will be arrived at by multiplying the number of contracts by 3.

· Here is we can illustrate the overall impact. Assume that an investor is long on 1 lot of Bharat Electronics Ltd (BEL) (3,800 shares) call option having pre-bonus strike price of Rs300. Post the bonus adjustment, the investor will effectively be long on 3 lots of BEL call options (11,400 shares) at a revised strike price of Rs100.

Like stock splits, bonuses are also value neutral. However, they do perform the task of bringing the stock price withing a more popular trading range.