Mergers, acquisitions, stock splits, dividends, and bonuses can affect share prices. These measures may also impact the futures and options contracts that depend on those underlying securities. Market players and investors must understand how business activities affect futures and options in order to manage their holdings successfully and predict changes in the derivatives markets.
Traders can make informed decisions and modify their strategies as necessary by being aware of the possible effects of corporate actions. Therefore, let's understand what corporate actions are and how they affect F&O.
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What Are Corporate Actions?
A corporate action is a decision made by a firm that directly influences shareholder value. Simply put, it is an event that causes a significant shift in the company and influences its stakeholders. It might be monetary, such as dividends, or non-monetary, such as stock splits or rights. While some company activities have a minor influence on stock prices, others that are significant might cause major shifts.
What Is the Impact of Corporate Actions On Futures & Options?
Corporate actions such as bonuses, rights, dividends, mergers, splits, amalgamation, and consolidations will cause changes in the primary stock's futures and options contracts. The groundwork for any adjustment for corporate actions should be in a way that the value of the market participants' positions, on the cum and ex-dates for the corporate action, will remain unchanged to the greatest extent possible.
According to the adjustment parameters, these changes will result in variances in the market lot, base price, and option strike prices. In many instances, changes may result in a modification in the contract expiry date, i.e., the contract may be closed earlier to that of the expiry date and the revised contracts will be traded.
The particular modifications necessary will be determined according to the scope of the corporate action. All open positions will be dependent on these changes in order to ensure market fairness and uniformity. Adjustments may include changes to positions and/or contract requirements as stated below, as long as the following basic foundation of adjustment is met:
Depending on the nature of the corporate action, the modifications would be made to any or all of the following. All positions available would be subject to corporate actions changes. Also, any adjustments for corporate actions would be made after the closure of trading hours on the final day. a security is traded on a cumulative basis in the underlying stock market.
Wrapping It Up
The foundation for any modification of corporate actions should be in a way that the estimation of the market participants' positions, on the cum and ex-dates for the corporate action, shall stay the same to the greatest extent possible. According to the modified parameters, these changes will result in variances in the market lot, base price, and option strike prices.
In many instances, changes may result in an update in the contract expiry date, i.e., the contract may be closed before the expiry date, and the updated contracts get traded. The changes will be made based on the sort of business activity involved. It is also worth noting that corporate action modifications could apply to all open positions.
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