Adjustment factor
The ratio by which the strike price, market lot and position of an equity F&O contract are revised after a bonus, split, consolidation or rights issue, so the position's value stays the same.
In plain language
If a company issues one bonus share for every share held, its share price roughly halves. An option with a strike of Rs 500 would suddenly look far out of the money, and a futures holder would appear to lose half the value, although nothing economic has happened.
The exchange prevents that by adjusting open F&O contracts. The adjustment factor is the number used to do it. Depending on the corporate action, the strike price is divided or multiplied by it, and the market lot and position are moved the other way, so that the value of the position on the cum and ex dates stays the same as far as possible. This also keeps options in the money, at the money or out of the money as they were.
How it works
When (Chapter 6, section 6.7.3). Adjustments are made on the last day the security trades cum-benefit, after the close of trading. They apply to all open positions, and may change strike price, position and market lot. Sometimes contracts are force-closed before expiry and adjusted contracts trade instead.
Bonus, stock splits and consolidations (section 6.7.5.1)
| Corporate action | Adjustment factor |
|---|---|
| Bonus, ratio A:B | (A + B) / B |
| Stock split or consolidation, ratio A:B | A / B |
- New strike = old strike ÷ adjustment factor
- New market lot = old lot × adjustment factor
- New position = old position × adjustment factor
Rights (section 6.7.5.2) — the direction reverses:
- New strike = old strike × adjustment factor
- New market lot = old lot ÷ adjustment factor
- New position = old position ÷ adjustment factor
- Dividends declared with the rights follow the dividend adjustment policy.
Fractions. Ratios like 3:7 create fractions. The exchange computes the value before adjustment and with the exact factor, rounds the strike to the nearest tick and the lot to the nearest integer, recomputes value, and handles any difference by adjusting strike or lot, so that no forced closure is needed.
The formula
Bonus A:B: Adjustment factor = (A + B) ÷ B
Split / consolidation A:B: Adjustment factor = A ÷ B
Rights: with A = rights entitlement, B = existing shares, P = underlying close on last cum date, S = rights issue price:
E (benefit per share) = (P − S) × A ÷ (A + B)
Adjustment factor = (P − E) ÷ P
A worked example
Contract details are illustrative; the formulas are the workbook's.
Bonus 1:1. Adjustment factor = (1 + 1) ÷ 1 = 2.
| Item | Before | After |
|---|---|---|
| Strike | Rs 500 | 500 ÷ 2 = Rs 250 |
| Market lot | 250 | 250 × 2 = 500 |
| Position (shares) | 250 | 500 |
Value check: 500 × 250 = Rs 1,25,000 before; 250 × 500 = Rs 1,25,000 after. This matches the workbook's cash-market bonus illustration, where a close of Rs 500 becomes an adjusted base price of Rs 250.
Rights 1:4 (one right for four shares held), P = Rs 500, S = Rs 400.
- E = (500 − 400) × 1 ÷ (1 + 4) = 100 ÷ 5 = Rs 20
- Adjustment factor = (500 − 20) ÷ 500 = 0.96
- Strike Rs 520 → 520 × 0.96 = Rs 499.20 (assuming this sits on the tick grid)
- Lot 500 → 500 ÷ 0.96 = 520.83, rounded to 521
Value before: 520 × 500 = Rs 2,60,000. After rounding: 499.20 × 521 = Rs 2,60,083.20. The Rs 83.20 difference is dealt with by the fraction procedure.
Why NISM asks about it
Chapter 6, section 6.7 (Corporate Actions Adjustment) is the source: the principle of unchanged position value (6.7.1), the list of actions (6.7.2), timing (6.7.3), what gets adjusted (6.7.4) and the formulas for bonus, splits, consolidations and rights (6.7.5.1–6.7.5.2). Expect a numerical question: compute the new strike or lot after a bonus or rights issue, often with the direction of multiplication as the trap.
Common exam traps
- Direction flips between bonus/split and rights. Bonus/split: strike ÷ factor, lot × factor. Rights: strike × factor, lot ÷ factor.
- Bonus factor is (A + B)/B, not A/B. A 1:1 bonus gives 2, not 1.
- Split/consolidation factor is A/B.
- For rights, the factor is below 1, because E is subtracted from P.
- Timing: after close on the last cum day, not on the record date.
- Adjustments apply to all open positions.
- Ordinary dividends (below 2%) need no adjustment; extraordinary dividends are adjusted by reducing strikes, not by an adjustment factor.
Where this is taught
- Series VII · Chapter 6: Settlement Processintroduced here
- Series VIII · Chapter 6: Trading Mechanismintroduced here
Related terms
- Record dateThe date on which a company looks at its register and decides who gets the bonus, dividend, rights or split — you must be holding the shares in your demat account at the end of that day.
- Stock splitA corporate action that cuts the face value of a share in a defined ratio and multiplies the number of shares to match — more shares, a lower price, and not one rupee of new value.
- Extraordinary dividendFor equity F&O adjustment, a dividend at or above 2% of the underlying's market price; the dividend is deducted from all option strikes and from futures positions from the ex-dividend date.
- Rights issueAn offer of new shares at a set price to existing shareholders in a fixed ratio to what they already hold, so that their proportionate stake is not diluted when the company raises fresh capital.
- Bonus sharesAdditional shares issued free to existing shareholders in proportion to their holding — no tax at allotment, a nil cost of acquisition, and a fresh holding period from the allotment date.
- Strike priceThe price fixed in an option contract at which the buyer may buy (call) or sell (put) the underlying if he chooses to exercise — fixed for the life of the contract, unlike the premium.
- Open positionAn outstanding, unsettled long (buy) or short (sell) position in a contract; margins, exposure limits, daily MTM and corporate-action adjustments are all applied to open positions.
- Closing Auction SessionA 20-minute call auction session, from 3:15 pm to 3:35 pm, being phased in to determine the closing price of stocks that have derivative contracts, replacing the last-30-minutes VWAP method for them.
- Ex-dateThe first day a security trades without a corporate action benefit, and the cut-off that decides whether a short-delivery auction near that action proceeds normally or is closed out directly instead.