What happens to P&L in futures contracts when extraordinary dividends/Split/Bonus are declared while contracts are open?

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Dividends

The adjustment process depends on the classification of the dividend. If the declared dividend is below 2% of the market value of the underlying stock, it is treated as an ordinary dividend, and no adjustment is made to the strike price.  However, if the dividend exceeds 2% of the market value, it is classified as an extraordinary dividend, and adjustments are made to both the strike price and the futures price of the contract. You can read more in the exchange circular on the treatment of P&L for futures contracts with extraordinary dividends.

In cases where adjustments are required, your trades are closed at the closing price, accounting for any mark-to-market (MTM) gains or losses. Simultaneously, a new trade is opened at an adjusted price, calculated as the Closing Price minus the Dividend.

For example, let’s consider ABC Ltd, with a market price of ₹419.70 and a declared dividend of ₹9.50 per share, equivalent to 2.26% of the market value. Since this exceeds 2%, it is classified as an extraordinary dividend, requiring adjustments in F&O contracts.

Suppose you bought ABC Ltd Futures at ₹415.50 on 29-04-2024. At the end of the trading day (EOD) on 29-04-2024, your trade would be closed at the closing price of ₹412.25, reflecting any MTM gains or losses. Simultaneously, a new trade would be opened at an adjusted price, calculated as the Closing Price minus the Dividend (₹412.25 - ₹9.50 = ₹402.75). This adjusted price of ₹402.75 becomes the new open rate for your position in ABC Ltd.

Bonus

Option strike prices are adjusted based on the bonus issue ratio. For a 1:1 issue, the adjustment factor is 2. To maintain the same contract value after the bonus, the futures and options prices are divided by this factor.  The revised lot size is arrived at by multiplying the factor with the current lot size.

Bonus ratio: 1:1

Strike price: 100

Lot size: 500

Revised lot size: 1000 (i.e., 500×2)

Revised strike price: 50 (i.e., 100/2)