INVESTOR
EDUCATION
INVESTOR
EDUCATION
Callable Bull/Bear Contract (CBBC)
A Callable Bull/Bear Contract (CBBC) is an instrument that tracks the performance of an underlying asset. The trading price of a CBBC tends to mirror the movement in the price of its underlying asset. Like warrants, CBBCs can be issued over a range of eligible underlying assets prescribed by the Exchange from time to time.
A CBBC can be issued as a bull contract or a bear contract
(a) A “bull” CBBC may be invested in by an investor who holds a view that the price of the underlying asset will increase during the term of the CBBC.
(b) A “bear” CBBC may be invested in by an investor who holds a view that the price of the underlying asset will decrease during the term of the CBBC.
Features of CBBCs
CBBC price moves tend to track the price moves of the underlying assets closely:
The price of a CBBC tends to follow closely the price of the underlying assets (ie delta close to one).Thus, if the underlying assets increase in value, a Bull CBBC with entitlement ratio of 1 to 1 generally increases in value by approximately the same amount, whereas a Bear CBBC with entitlement ratio of 1 to 1 generally decreases in value by approximately the same amount. Due to this property, CBBC issuers offer investors a product which tracks the price movement of the underlying assets more closely and with higher price transparency than some other structured products. However, when the underlying assets of a CBBC are trading at a price close to its Call Price, the value of CBBC may become more volatile and the change in its value may be disproportionate to the change in the value of the underlying assets.
Category N CBBC and
Category R CBBC
Category R CBBC refers to a CBBC that has a “residual value” after the mandatory call event. When a Category R CBBC is called, its intrinsic value is generally above HKD0, and therefore it may have residual value to be distributed to its holders.
Category N CBBC refers to a CBBC that has “no residual value” after the mandatory call event, its call price and the exercise price are set at the same level.
Difference between CBBCS and Warrants
| CBBCs | Warrants | |
| Gearing | Gearing effect | Gearing effect |
| Mandatory Call Event | Terminated early when the price of theunderlying asset hits the call price | No mandatory call feature |
| Implied volatility | Insignificant to trading price of CBBCs | Affects trading price of Warrants |
| Time Value | Non-main factors affecting price | Time value reflects |
Risk disclosure
Investors should take into account the following risk factors – among others
Mandatory call
A CBBC will be called by the issuer when the price of the underlying assets hits the Call Price, and that CBBC will expire early. The payoff for Category N CBBC is zero when they expire early. When Category R CBBC expire early the holder may receive a small residual value payment, but there may be no residual value payment in some situations. Dealers may charge their clients a service fee for the collection of the residual value payment from the respective issuers.
Limited life
CBBCs have an expiry date and therefore a limited life. Unless the CBBCs are in-the-money, they become worthless when they expire.
Liquidity
Although CBBC have liquidity providers, there is no guarantee that investors will be able to buy/sell CBBC at their target prices any time they wish.
Gearing effect
Although warrants often cost less than the underlying assets, a warrant may change in value to a much greater extent than the underlying assets. In the worst case the value of CBBCs may fall to zero and holders may lose their entire investment amount.
Funding costs
When a CBBC is called, the CBBC holders will lose the funding cost for the full period, since the funding cost is built into the CBBC price upfront at launch, even though the actual period of funding for the CBBC turns out to be shorter when there is an MCE. In any case, investors should note that the funding costs of a CBBC after launch may vary during its life and the liquidity provider is not obliged to provide a quote for the CBBC based on the theoretical calculation of the funding costs for that CBBC at launch.
For the basic knowledge and trading mechanism of Callable Bull/Bear Contract (CBBC), please refer to the information provided by Investor and Financial Education Council. You should pay careful attention to the Liability Statement section on the homepage of the website of The IFEC at (www.ifec.org.hk) when referring to information using this link.
Callable Bull/Bear Contract (CBBC)
A Callable Bull/Bear Contract (CBBC) is an instrument that tracks the performance of an underlying asset. The trading price of a CBBC tends to mirror the movement in the price of its underlying asset. Like warrants, CBBCs can be issued over a range of eligible underlying assets prescribed by the Exchange from time to time.
A CBBC can be issued as a bull contract or a bear contract
(a) A “bull” CBBC may be invested in by an investor who holds a view that the price of the underlying asset will increase during the term of the CBBC.
(b) A “bear” CBBC may be invested in by an investor who holds a view that the price of the underlying asset will decrease during the term of the CBBC.
Features of CBBCs
CBBC price moves tend to track the price moves of the underlying assets closely:
The price of a CBBC tends to follow closely the price of the underlying assets (ie delta close to one).Thus, if the underlying assets increase in value, a Bull CBBC with entitlement ratio of 1 to 1 generally increases in value by approximately the same amount, whereas a Bear CBBC with entitlement ratio of 1 to 1 generally decreases in value by approximately the same amount. Due to this property, CBBC issuers offer investors a product which tracks the price movement of the underlying assets more closely and with higher price transparency than some other structured products. However, when the underlying assets of a CBBC are trading at a price close to its Call Price, the value of CBBC may become more volatile and the change in its value may be disproportionate to the change in the value of the underlying assets.
Category N CBBC and Category R CBBC
Category R CBBC refers to a CBBC that has a “residual value” after the mandatory call event. When a Category R CBBC is called, its intrinsic value is generally above HKD0, and therefore it may have residual value to be distributed to its holders.
Category N CBBC refers to a CBBC that has “no residual value” after the mandatory call event, its call price and the exercise price are set at the same level.
Difference between CBBCS and Warrants
| CBBCs | Warrants | |
| Gearing | Gearing effect | Gearing effect |
| Mandatory Call Event | Terminated early when the price of theunderlying asset hits the call price | No mandatory call feature |
| Implied volatility | Insignificant to trading price of CBBCs | Affects trading price of Warrants |
| Time Value | Non-main factors affecting price | Time value reflects |
Risk disclosure
Investors should take into account the following risk factors – among others
Mandatory call
A CBBC will be called by the issuer when the price of the underlying assets hits the Call Price, and that CBBC will expire early. The payoff for Category N CBBC is zero when they expire early. When Category R CBBC expire early the holder may receive a small residual value payment, but there may be no residual value payment in some situations. Dealers may charge their clients a service fee for the collection of the residual value payment from the respective issuers.
Limited life
CBBCs have an expiry date and therefore a limited life. Unless the CBBCs are in-the-money, they become worthless when they expire.
Liquidity
Although CBBC have liquidity providers, there is no guarantee that investors will be able to buy/sell CBBC at their target prices any time they wish.
Gearing effect
Although warrants often cost less than the underlying assets, a warrant may change in value to a much greater extent than the underlying assets. In the worst case the value of CBBCs may fall to zero and holders may lose their entire investment amount.
Funding costs
When a CBBC is called, the CBBC holders will lose the funding cost for the full period, since the funding cost is built into the CBBC price upfront at launch, even though the actual period of funding for the CBBC turns out to be shorter when there is an MCE. In any case, investors should note that the funding costs of a CBBC after launch may vary during its life and the liquidity provider is not obliged to provide a quote for the CBBC based on the theoretical calculation of the funding costs for that CBBC at launch.
For the basic knowledge and trading mechanism of Callable Bull/Bear Contract (CBBC), please refer to the information provided by Investor and Financial Education Council. You should pay careful attention to the Liability Statement section on the homepage of the website of The IFEC at (www.ifec.org.hk) when referring to information using this link.
