Extraordinary dividend - Example n.3

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The company Beta, after distributing a dividend as per its payment policy, pays an additional dividend before the end of 2005.

Overview of the operation

On January 10^th 2005, the company Beta informs that in accordance with its dividend policy, will pay a dividend in May 2005.

However, during the year, the company decides to distribute another dividend equal to 0.25 euro which was not indicated in the dividend payment policy.

The minimum lot size of Beta’s stock option and stock future contracts is 1,000, whereas the official price of the stock in the day prior to the payment is 14.20 euro.

This dividend is not included in the company’s distribution policy but can be considered as a one-off, not an advance to the dividend expected in the following year. For these reasons, the dividend is considered extraordinary.

Therefore, in relation to option contracts on Beta’s shares, the adjustment operation affects both the strike price and the number of securities included in the contract (lot size), and the adjustments is applied to all the existing expiries.

Similarly, in relation to stock future contracts, the adjustment operation affects both the daily closing price and the number of shares included in the contract (lot size), and the adjustments is applied to all the existing expiries.

The adjustment is made on the basis of the coefficient (K), calculated as follows:

14.20 – 0.25           
K =  ----------------- = 0.982394
14.20          

Adjustment of strike prices (daily closing prices)

E_ex = E_cum x 0.982394

where:

• E_cum = strike price (daily closing price) before the adjustment
• E_ex = strike price (daily closing price) after the adjustment

Adjustment to the number of shares included in the stock option and stock future contracts (lot)

   1
A_ex = 1,000 x ------------ = 1,018
         0.982394

where:

• A_ex = number of shares after the adjustment

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