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Let's say a company's stock is going to get split into two. All derivative contracts, such as options and futures, will be adjusted accordingly, of course.
When are the futures and options contracts adjusted? Are they adjusted on the date the company announces a stock split? Or are they adjusted on the record date or the ex date?
Forward contracts are not regulated by exchanges. Are they adjusted too during a stock split?
When are the futures and options contracts adjusted? Are they adjusted on the date the company announces a stock split? Or are they adjusted on the record date or the ex date?
If we take the Options Clearing Corporation as an example, their bylaws state that adjustments are made on the ex-date:
Adjustments pursuant to this Section 3 shall as a general rule become effective in respect of outstanding stock futures on the "ex-date" established by the primary market for the underlying security
Forward contracts are not regulated by exchanges. Are they adjusted too during a stock split?
Arrangements may differ as they are bilateral agreements and there is a large amount of variety in the details of over-the-counter derivatives. The International Swaps and Derivatives Association (ISDA - an OTC derivatives trade association) has however standardized a lot of legal documentation, including master agreements, master confirmations, etc. One such example of a master confirmation agreement (MCA) providing for adjustments in case of stock splits is archived on the SEC website. See here an excerpt from article 12 of that MCA:
Strike Price Floor. Notwithstanding anything to the contrary in the Agreement, this Master Confirmation, any Confirmation or the Definitions, in no event shall the Strike Price be subject to adjustment to the extent that, after giving effect to such adjustment, the Strike Price would be less than USD 64.63, except for any adjustment pursuant to the terms of this Master Confirmation and the Equity Definitions in connection with stock splits or similar changes to Issuer’s capitalization.
With equity options, the option contracts are adjusted on the day that the stock split occurs. The terms of the adjustment depend on the nature of the split.
Read this for some examples.
