What is the impact of Corporate actions on futures and options?

What is the impact of Corporate actions on futures and options?

Corporate actions can have various impacts on futures and options contracts. Here are some key points:

1. Adjustments in Contract Terms: Corporate actions such as stock splits, mergers, acquisitions, or spin-offs can lead to adjustments in the terms of futures and options contracts. These adjustments ensure that the contracts remain fair and accurately reflect the underlying asset's value changes.

Adjustments aim to maintain the value of positions in the contract.

These adjustments occur on the last trading day after market hours when a security is traded cum-basis in the equity market. Depending on the adjustment factor, base prices, options strike values, and market lots may change.

Contract expiry dates might also be adjusted, causing contracts to close earlier than usual, with adjusted contracts taking their place After Market Orders (AMO) placed before the ex-date may be rejected due to changes in lot size.

The average rate for futures positions displayed on our trading platforms reflects the original execution rate, not the adjusted rate due to corporate actions. Therefore, traders should look at the closing rate in the Daily P&L column for actual profits and losses from the last settlement day, which can also be checked in the P&L.

2. Changes in Underlying Asset: Corporate actions may result in changes to the composition or value of the underlying asset. For example, a stock split may increase the number of shares outstanding, leading to adjustments in the futures and options contracts based on that stock.

3. Volatility and Price Movements: Corporate actions can often lead to increased volatility and price movements in the underlying asset. This increased volatility can impact the pricing of futures and options contracts, leading to adjustments in premiums and contract values.

4. Trading Suspensions: In some cases, corporate actions such as mergers or acquisitions may result in temporary trading suspensions in the underlying asset. This suspension can impact the liquidity and availability of futures and options contracts based on that asset.

5. Opportunities for Arbitrage: Corporate actions can create arbitrage opportunities between markets or instruments. Traders may exploit these opportunities by simultaneously trading futures, options, or underlying assets to profit from price discrepancies resulting from corporate actions.



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