Hong Kong Exchanges and Clearing Limited (HKEx) has announced the arrangements for the adjustment to the contract terms of all open Li & Fung (LIF) Futures and Options contracts in existence after the market close on 8 May 2006, the business day immediately before the ex-bonus date, which is 9 May 2006, to account for bonus shares to be issued on the basis of one bonus share for every 10 existing ordinary shares.
Highlights of the adjustment arrangements to LIF Futures and Options contracts are attached below. Investors should consult their brokers for further details, or if they have any questions regarding the adjustment.
LIF Futures Contracts
After the market close on 8 May 2006:
|
2) |
An adjusted contract multiplier for outstanding contracts will be obtained by the following formula and rounded to the nearest four decimal places:
Contracted prices of outstanding LIF Futures contracts x 2,000 / ACP
where the contract multiplier of LIF Futures contracts is 2,000 shares |
Trading symbols:
|
2) |
The available contract months for standard LIF Futures contracts with the original contract multiplier of 2,000 shares (standard contracts), under the original trading symbol LIF, will be May, June, July, September and December 2006. New contract months under LIF will be listed according to the normal procedures. |
LIF and LIA Futures contracts will be available for trading as shown below:
|
|
Available for Trading |
Addition of New Contract Months |
|
9 May - 28 Dec 2006 |
29 Dec 2006 onwards |
|
LIF (Standard) |
Yes |
Yes |
Yes |
|
LIA (Adjusted) |
Yes |
No |
No |
Open positions:
The number of open positions in the old LIF Futures contracts will be transferred to the respective LIA Futures contracts. It should be noted that only the contracted prices and contract multiplier are being adjusted; there will not be any changes to the number of open positions and contract months whatsoever after the adjustment. All such open contracts will be traded and settled under the adjusted contract terms from 9 May 2006 onwards.
Settlement on the Last Trading Day:
LIA Futures contracts will be cash settled on the Last Trading Day for the spot month contracts.
For standard LIF Futures contracts, the cash settlement amount of spot month contracts on the Last Trading Day will be calculated using the Standard Contract Multiplier of 2,000 shares per contract under normal procedures.
The above capital adjustment, once made, will be conclusive and binding on all LIF Futures contracts.
LIF Options Contracts
After the market close on 8 May 2006:
|
2) |
An adjusted contract size will be obtained by the following formula and rounded to the nearest four decimal places:
Exercise prices of outstanding LIF Options contracts x 2,000 / AEP
where the contract size of LIF Options contracts is 2,000 shares |
Trading symbols:
|
2) |
The available expiry months for standard LIF Options contracts with the original contract size of 2,000 shares (standard contracts), under the original trading symbol LIF, will be May, June, July, September and December 2006. New expiry month and series under LIF will be listed according to the normal procedures. |
LIF and LIA Options contracts will be available for trading as shown below:
|
|
Available for Trading |
Addition of New Option Contracts |
|
9 May - 28 Dec 2006 |
29 Dec 2006 onwards |
|
LIF (Standard) |
Yes |
Yes |
Yes |
|
LIA (Adjusted) |
Yes |
No |
No |
Open Positions:
The number of open positions in the old LIF Options contracts will be transferred to the respective adjusted series under LIA Options contracts. It should be noted that only the exercise prices and contract sizes are being adjusted; there will not be any changes to the number of open positions and expiry months whatsoever after the adjustment. All such open contracts will be traded and settled under the adjusted contract terms of adjusted exercise price and adjusted contract size per contract from 9 May 2006 onwards.
Settlement of Exercised Options Trades:
Market participants should note that the exercise and assignment of LIA Options contracts will result in odd lots and fractional shares.
The exercise / assignment of standard LIF Options Contracts will result in a stock settlement obligation of 2,000 shares per contract and will be settled under normal procedures.
The above capital adjustment, once made, will be conclusive and binding on all LIF Options contracts.
Examples of Capital Adjustment Effects on Contracted Prices
and Contract Multiplier of LIF Futures
Formula for Adjustment ratio
|
|
Adjustment ratio (R) = 10 / (1+10) = 0.9091 (rounded to 4 decimal places)
|
Example of Adjustment on a LIF May Contract:
|
|
|
Adjusted Contract Price (ACP) = $16.92 x 0.9091 = $15.38 (rounded to two decimal places)
|
|
|
Adjusted Contract Multiplier = (16.92 x 2000) / [16.92 x (10 / 11)] = 2200.0000 (rounded to four decimal places) |
Examples of Adjustment on Different LIF Futures Contracts:
|
Before Capital Adjustment |
After Capital Adjustment |
|
May |
16.92 |
2000 |
15.38 |
2200.0000 |
|
June |
17.01 |
2000 |
15. 46 |
2200.0000 |
|
July |
17.12 |
2000 |
15.56 |
2200.0000 |
|
Sept |
17.23 |
2000 |
15.66 |
2200.0000 |
|
Dec |
17.33 |
2000 |
15.75 |
2200.0000 |
Example of Capital Adjustment Effects on Strike Price
and Contract Size of LIF Options Contracts
Formula for Adjustment Ratio
|
|
Adjustment ratio = 10 / (1+10) = 0.9091 (rounded to four decimal places)
|
Example of Adjustment on a LIF 15.00 Contract
|
|
|
Adjusted exercise price = $15.00 x 0.9091 = $13.64 (rounded to two decimal places)
|
|
|
Adjusted contract size = (15.00 x 2000) / 13.64 = 2199.4135 (rounded to four decimal places) |
Example of Adjustment on Different LIF Option Contracts
|
Before Capital Adjustment |
After Capital Adjustment |
|
13 |
2000 |
11.82 |
2199.6616 |
|
14 |
2000 |
12.73 |
2199.5287 |
|
15 |
2000 |
13.64 |
2199.4135 |
|
16 |
2000 |
14.55 |
2199.3127 |
|
17 |
2000 |
15.45 |
2200.6472 |
Cash Settlement of Fractional Shares
General Principle
All fractional shares are settled in cash, ie it is assumed that the buyer of the stock will sell and the seller of the stock will buy the fractional shares at the market closing price on the day of exercise. The actual cash settlement amount of the fractional shares is the difference between the strike price and the market closing price on the day of exercise times the fractional shares quantity for each contract exercised.