NISM VIII — Equity Derivatives ~5 min read

Corporate Actions — Adjustments and Trading Costs

Corporate actions (bonus, split, dividend, M&A) on the underlying stock require the exchange to adjust the open derivative contracts so that the economic positi...

Definition

Contract Adjustment Framework

Corporate actions (bonus, split, dividend, M&A) on the underlying stock require the exchange to adjust the open derivative contracts so that the economic position of existing holders is preserved. SEBI mandates a specific adjustment formula for each action.

In Simple Words

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For a bonus issue (e.g., 1:1) or split, strike prices and lot sizes are adjusted so that the contract notional stays the same: new strike = old strike × (existing / new shares); new lot size = old × (new / existing). Dividends above 2% (extraordinary dividends) cause strike reduction by the dividend amount; ordinary dividends are ignored (priced into futures already). For mergers/de-mergers, the adjustment can be complex — often the stock is removed from F&O for a period. Trading costs include brokerage (0.01–0.10%), exchange transaction charges, STT (0.01% on futures sell-side, 0.125% on options on premium, 0.017% on options delivered into stock), SEBI turnover fee, GST and stamp duty.

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Preserve Economic Position

After split/bonus, your contract's rupee exposure should be unchanged

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STT Structure

Tax differs for futures vs options vs delivery-settled options

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Ordinary vs Special Dividend

Only extraordinary (>2%) triggers strike adjustment

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M&A = Freeze

Complex corporate events may delist the derivative

Real-Life Scenario

A Practical Example

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Reliance

Real-Life Scenario

Reliance announces 1:1 bonus (ex-date 5 May). You hold 1 lot of 2400 Call (250 shares). Adjustment on ex-date:
• New strike = 2,400 × (1 / 2) = ₹1,200
• New lot size = 250 × (2 / 1) = 500
• Contract notional before = 2,400 × 250 = ₹6,00,000
• Contract notional after = 1,200 × 500 = ₹6,00,000 ✓ (unchanged)

For an extraordinary ₹100 dividend on a ₹2,400 stock (>2%): new strike = 2,400 − 100 = ₹2,300; lot size unchanged.

Key Points to Remember

What Makes This Important

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Bonus/split → adjust both strike and lot size proportionally

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Extraordinary dividend (> 2% of price) → reduce strike by dividend amount

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Ordinary dividend (< 2%) → no adjustment (futures price already embeds it)

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Complex M&A → may lead to early settlement / de-listing of contracts

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Adjustments are applied by the Clearing Corporation on ex-date

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STT — futures sell 0.01%; options premium 0.125%; option delivery 0.125% on settlement value

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Other costs: brokerage, exchange fee, SEBI fee, GST, stamp duty

FAQs

Frequently Asked Questions

Futures prices are continuously priced off cost-of-carry which already subtracts expected dividends. Adjusting the contract for ordinary dividends would double-count. Only unexpected (extraordinary) dividends create a one-time price shock that requires contract adjustment.

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