InvestorQ : How will the futures and options contracts of REC be adjusted for the bonus issue just announced?
rhea Babu made post

How will the futures and options contracts of REC be adjusted for the bonus issue just announced?

Answer
image
Riya Dwivedi answered.
4 days ago
Follow

Here is how the adjustment of Futures and Options contracts in the security Rural Electrification Corporation (REC) happen post the bonus issue.

· The bonus being a return neutral corporate action, will impact the F&O contracts as it will impact the pricing and holding of shares of the company. There would be an update on a number of fronts for the REC stock.

· Let us first look at the Adjustment factor. The Adjustment factor for Bonus issue of A: B is defined as (A+B)/B. Therefore, in the case of RECLTD, the adjustment factor would (1+3)/3=1.3333 since the bonus issue ratio is 1:3. That means, REC will issue 1 bonus share for every 3 shares held, so if you hold 300 shares, you get 100 shares as bonus.

· Here is how the adjustments for Options Contracts would happen. Let us first look at how the strike price of the options contracts would be executed. The adjusted strike price will be arrived at by dividing the old strike price by the adjustment factor. So the old strike price of Rs133 would now become Rs100, and this is just an approximation.

· Let us also look at how the market lot would be adjusted to effect the bonus issue. The adjusted market lot shall be arrived at by multiplying the old market lot by the adjustment factor. Since the old market lot was 6,000 shares, the revised market lot would stand modified to 8,000 shares.

· Having understood adjustment for options contracts, let us focus on the adjustments for Futures Contracts. Let us first talk about the futures base price. The adjusted futures base price shall be arrived at by dividing the old futures price by the adjustment factor. As in the case of options, the Rs133 price will stand adjusted to Rs100.

· Let us also look at how the market lot would be adjusted to effect the bonus issue on the futures contract. The adjusted market lot shall be arrived at by multiplying the old market lot by the adjustment factor, exactly as in options. Since the old market lot was 6,000 shares, the revised market lot would stand modified to 8,000 shares.

It must be noted here that all these above changes shall be effective from August 17, 2022.

5 Views