How are options and futures adjusted for bonus, consolidation and splits?
Answer
Answer
The methodology to be followed for adjustment Bonus, Stock Splits and Consolidations
Strike Price: The new strike price shall be arrived at by dividing the old strike price by the adjustment factor as under
Market Lot / Multiplier: The new market lot / multiplier shall be arrived at by multiplying the old market lot by the adjustment factor as under
Position: The new position shall be arrived at by multiplying the old position by the adjustment factor as under
Bonus Issues
Ratio – A : B
Adjustment factor : (A+B)/B
Stock Splits and Consolidations Ratio - A : B
Adjustment factor : A/B
The above methodology may result in fractions due to the corporate action e.g. a bonus ratio of 3:7. With a view to minimising fraction settlements, the following methodology is adopted.
Compute value of the position before adjustment
Compute value of the position taking into account the exact adjustment factor
Carry out rounding off for the Strike Price and Market Lot
Compute value of the position based on the revised strike price and market lot
The difference between 1 and 4 above, if any, is decided in the manner laid down by the relevant authority by adjusting Strike Price or Market lot, so that no forced closure of open position is mandated.