The Board of Directors of Indian Energy Exchange Ltd. (IEX) in its meeting held on October 21, 2021, approved the issue of bonus shares in the ratio of 2:1 (2 equity shares of every 1 equity share held). The ex-date being December 3, 2021.
SEBI has prescribed a framework to the exchanges for adjustment of corporate actions in derivative contracts at the time of the corporate action. The exchange has published everything regarding the adjustments in the case of corporate actions here. The adjustments are carried out in such a way that the value of the position of the market participants, on the cum and ex-dates for the corporate action, continue to remain the same as far as possible.
As a result of IEX announcing the issue of bonus shares, the Futures and Options contracts in IEX will be adjusted according to the framework prescribed by SEBI. The adjustment will be both in Strike Price and Lot Size of Options and Price and Lot Size of the Futures contract. You can check the announcement from the exchange here.
Here’s how the adjustment works out:
Calculation of the adjustment factor:
Adjustment factor for Bonus issue of A:B is defined as (A+B)/B. In the case of IEX, the adjustment factor is (2+1)/1 = 3 since the bonus issue ratio is 2:1.
Adjustment for Options Contracts:
Strike Price: The adjusted strike price will be arrived at by dividing the old strike price by the adjustment factor.
Lot Size: The adjusted lot size will be arrived at by multiplying the old market lot by the adjustment factor. The revised lot size would be 3750.
Assume you hold a position in IEX 800 CE, the current lot size is 1250. On ex-date, the 800 CE will be adjusted to 266.65 (Strike Price 800 / Adjustment Factor 3) and the lot size will be adjusted to 3750 (Current Lot Size: 1250 * Adjustment Factor 3).
Adjustment for Futures Contracts:
Futures base price: The adjusted futures base price will be arrived at by dividing the settlement price of the future one day before the ex-date by the adjustment factor.
Futures lot size: The adjusted market lot will be arrived at by multiplying the old market lot by the adjustment factor. The revised market lot would be 3750.
Assume you are holding a position in IEX DEC Futures and on pre-ex-date (November 25, 2021) futures close at 770.7, on ex-date the price will be adjusted to 256.9 (Price on pre-ex-date: 770.7 / Adjustment Factor: 3)
While the lot size will be adjusted to 3750 (Current lot size: 1250 * Adjustment Factor: 3).
Holders of F&O contracts are not eligible for corporate action benefits. If you are holding equity shares of IEX on ex-date (December 3, 2021) you will be eligible to receive the bonus shares. The credit of shares can take up to 15 days from the record date (December 6, 2021). You can learn more about this here.