Extraordinary dividend - Example n.4

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Payment of a dividend whose amount exceeds 10%.

On January 22^nd 2006, the company Alpha informs in its dividend payment policy that the dividend will be distributed in May. In April, the competent body of the company approves the Financial Statements and proposes the distribution of a dividend equal to 0.8 euro, whereas the average official price of the Alpha share in the five days prior to the date of the competent body of the company meeting is 2 euro. The minimum lot size of Alpha’s stock option and stock future contracts is 100; the official price prior to the payment date is equal to 2.55 euro.

As the dividend amount (0.80 euro) is equal to 40% of the average official prices, only the part exceeding the 10% is considered as "extraordinary dividend".

In the specific case, the part of ordinary dividend amounts to 0.20 euro (10% of the average official price of the security in the five days prior to the competent body of the company meeting) whereas the remaining, i.e. 0.60 euro, is considered extraordinary and so must be adjusted.

Therefore, Alpha’s stock option and stock future contracts are adjusted only for the amount of 0.60 euro.

In relation to stock option contracts on Alpha’s shares, the adjustment operation affects both the strike price and the number of securities included in the contract (lot size) for all the existing expiries.

Similarly, in relation to Alpha’s stock future contracts, the adjustment operation affects both the daily closing price and the number of securities included in the contract (lot size) for all the existing expiries.

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

2.55 – 0.60             
K = --------------------------- = 0.764706
2.55             

Adjustment of strike prices (daily closing prices)

E_ex = E_cum x 0.764706

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 futures contracts (lot)

        1
A_ex = 100 x ------------- = 131
         0.764706

where:

• A_ex = number of shares after the adjustment

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