--- title: "What is the impact of Corporate Actions on F&O contracts?" description: "Corporate actions such as dividends, rights issues, mergers, demergers, stock splits, and bonus issues significantly impact Futures and Options (F&O)…" category: console subcategory: corporate-actions slug: what-is-the-impact-of-corporate-actions-on-f-o-contracts canonical: https://support.arrow.trade/console/corporate-actions/what-is-the-impact-of-corporate-actions-on-f-o-contracts/ --- # What is the impact of Corporate Actions on F&O contracts? > Corporate actions such as dividends, rights issues, mergers, demergers, stock splits, and bonus issues significantly impact Futures and Options (F&O)… ## Short answer Corporate actions such as dividends, rights issues, mergers, demergers, stock splits, and bonus issues significantly impact Futures and Options (F&O) contracts. The corporate actions that lead to these adjustments include dividends, bonus, rights issue, mergers, demergers and splits. These adjustments are made the day before the ex-date of the corporate action when the market closes. For instance, if the ex-date for an extraordinary dividend issue of a company were 06th December, the adjustments in all open F&O contracts would be made on 05th December. Base Price/Strike Price: The base price of the futures contract and the strike price of the options contracts will be modified as part of the adjustment process. Market Lot / Multiplier: The market lot or multiplier of the F&O contracts might also undergo changes in response to corporate actions. ## Dividends ## Example scenario Base price of Futures: Settlement price of the futures contract on the pre-ex date - Dividend amount. Strike price of Options: Old strike price - Dividend amount. Market Lot / Multiplier: The market lot or multiplier of the F&O contracts is not modified and remains the same in case of dividend declaration. ## Bonus ## Example scenario If the bonus ratio is A:B, then the adjustment factor will be (A+B)/B. In this case, the adjustment factor is (1+1)/1= 2. Base price of Futures: Old futures price ÷ Adjustment factor. Strike price of Options: Old strike price ÷ Adjustment factor. (All the strike prices will be adjusted accordingly) Market Lot / Multiplier: Old Market Lot * Adjustment Factor. ## Stock split and Consolidation of shares (Reverse stock split) ## Example scenario If the ratio is A: B, then the adjustment factor will be A/B. In this case, the adjustment factor is 5/1 = 5. Base price of futures: Old futures price ÷ Adjustment factor. Strike price of options: Old strike price ÷ Adjustment factor. (All the strike prices will be adjusted accordingly Market Lot / Multiplier: Old market lot * Adjustment factor. ## Rights issue ## Example Scenario Underlying close price on the last cum date (P) = 215.3. Issue price of the rights (S) = 150. Rights Entitlement (A) = 1. Number of existing shares (B) = 9. Total Entitlement is (A+B) = 1+9 = 10. Benefit per Right Entitlement (C) = (P-S) x A = (215.3-150) * 1 = 65.3. Benefits per share (E) = C / (A+B) = 65.3 / 10 = 6.53. Adjustment Factor = (P-E) / P = (215.3-6.53) / 215.3 = 0.96967. Base price of futures: Old futures price * Adjustment factor. Strike price of options: Old strike price * Adjustment factor. (All the strike prices will be adjusted accordingly) Market Lot / Multiplier: Old Market Lot / Adjustment Factor. ## Mergers ## Example Scenario Futures: Physical delivery shares of HDFC Ltd. were given/taken at the closing price of the underlying on the merger date, and they will be merged into shares of HDFC Bank on the merger date as per the defined ratio. Options: All in-the-money (ITM) options of HDFC expired with a value of zero, and the physical delivery of HDFC shares was executed at the designated strike price. These shares were then integrated into the source company, HDFC Bank. When mergers occur, there will be no introduction of new F&O contracts. All the current futures and options contracts will be automatically closed at the end of the market hours on the pre-ex date. After this, both the derivative contracts and the underlying assets won't be visible on the following day, which is the ex-date. On the pre-ex date, any positions of HDFC Ltd. that a client still holds and hasn't closed will be settled at the settlement price determined on the pre-ex date for the underlying asset. Demerger Demerger, also known as spin-off or divestiture, refers to the process of a company splitting or separating its business divisions, subsidiaries, or assets into distinct independent entities. ## Demerger In the event of demergers, any open or existing positions (contracts) as of the pre-ex-date (after the market closes) will be automatically closed (expired). New contracts will then be introduced on the ex-date of the underlying asset. Following the price established after the opening of the market, a minimum of five in-the-money strikes, one at-the-money strike, and five out-of-the-money strikes will be introduced. Example scenario Reliance - Jio Financial demerger: ## Example scenario Options: All in-the-money options of Reliance will expire with a value of zero, and the physical delivery of shares will occur at the designated strike price. Futures: Physical delivery shares of Reliance will be given/taken at the closing price of the underlying. ## Related - Browse more in [corporate actions](/console/corporate-actions/) - Open account: [kyc.arrow.trade](https://kyc.arrow.trade) - Trade on Arrow: [app.arrow.trade](https://app.arrow.trade) - Support: [support@arrow.trade](mailto:support@arrow.trade) --- Source: https://support.arrow.trade/console/corporate-actions/what-is-the-impact-of-corporate-actions-on-f-o-contracts/ Publisher: Arrow / iRage Broking Services LLP