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Callable Bull / Bear Contracts (CBBC)
CBBC are similar to other derivative warrants in the way that it is structured to let investors track the performance of an underlying asset (like stocks or indices, etc.) without being required to pay the full price required to own the actual asset.
Both CBBC and derivative warrants have a leverage effect. However, CBBC are issued with the condition that during their lifespan they will be called by the issuers when the price of the underlying asset reaches a level (known as the "Call Price") specified in the listing document. If the Call Price is reached before expiry, the CBBC will expire early and the trading of that CBBC will be terminated immediately. The specified expiry date from the listing document will no longer be valid.
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How do CBBC work?
A CBBC is generally issued at a price that represents the difference between the Spot Price of the underlying asset and the Strike Price of the CBBC, plus funding costs. For Bull contracts, the Call Price can be equal to or higher than the Strike Price; whereas for Bear contracts, the Call Price can be equal to or lower than the Strike Price. The following example illustrates how a Bull contract works:
Example 1: Category N Bull Contract (A category without Residual Value)
At the time of issuance
| Underlying asset | Stock X |
| Spot Price | $110 |
| Call Price (fixed at issue) | $90 |
| Strike Price (fixed at issue) | $90 |
| Funding Costs (8%) | $7.2 |
| Contract Entitlement | 100 : 1 |
| Expiry | 12 months |
| Settlement Price under Mandatory Calling Event | N/A |
| Settlement Price at expiry | Closing Price of Stock X on last trading day |
Theoretical price at issue:
= [(Spot Price - Strike Price + Funding Costs) / Entitlement]
= $0.272
Value of one board lot (e.g. 10,000 shares) = $2,720
Situation 1: If Spot Price falls to $90 (i.e. the Call Price)
Mandatory Call Event occurs, the Bull Contract is called and trading is terminated. There will be no residual payment and net loss of the investor will be the original investment of $2,720.
Situation 2: If not called before expiry and at expiry the settlement price of Stock X is $130
Settlement amount of a Bull Contract:
= (Settlement Price - Strike Price) / Entitlement
= ($130 - $90) / 100
= $0.4
Value of one board lot (e.g. 10,000 shares) = $4,000
Payoff of one board lot = $4,000 - $2,720 = $1,280
Rate of Return = $1,280 / $2,720 = 47%
Example 2: Category R Bull Contract (A category with Residual Value)
At the time of issuance
| Underlying asset | Stock X |
| Spot Price | $110 |
| Call Price (fixed at issue) | $95 |
| Strike Price (fixed at issue) | $90 |
| Funding Costs (8%) | $7.2 |
| Contract Entitlement | 100 : 1 |
| Expiry | 12 months |
| Settlement Price under Mandatory Calling Event | Determined by Issuer, and assumed to be $94 in this example |
| Settlement Price at expiry | Closing Price of Stock X on last trading day |
Theoretical price at issue (same as example 1):
= [(Spot Price - Strike Price + Funding Costs) / Entitlement]
= $0.272
Value of one board lot (e.g. 10,000 shares) = $2,720
Situation 1: If Spot Price falls to $95 (i.e. the Call Price)
Mandatory Call Event occurs, the Bull Contract is called and trading is terminated.
Residual value of the Bull Contract at Call:
= (Settlement Price* - Strike Price) / Entitlement
= ($94 - $90) / 100
= $0.04
* If Settlement Price is determined to be less than the Strike Price, no residual payment will be received.
Value of one board lot (e.g. 10,000 shares) = $400
Net loss of one board lot ($2,720 - $400) = $2,320
Situation 2: If not called before expiry
The payoff will be the same as in Example 1 above.
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