Frequently Asked Question
Callable Bull/Bear Contracts (CBBC) are structured products or derivative products that track the performance of an underlying asset (or assets). They are issued either as Bull or Bear contracts, allowing investors to take bullish (Bull Contract) or bearish (Bear Contract) positions on the underlying asset with a relatively small capital outlay.
CBBC expire at a fixed date. However, during their life, they may be called immediately by the issuers if the price of the underlying asset reaches a given level, known as the Call Price, before expiry. The Call Price is lower than the Spot Price at the time of issue for a Bull Contract whereas the Call Price is higher than the Spot Price at the time of issue for a Bear Contract.
There are two categories of CBBC: those with no residual value (N) and those with a possibility of residual value (R). Once the price of the underlying asset of a CBBC reaches the Call Price, a category N CBBC becomes worthless while a category R CBBC may still be entitled to a residual payment from the issuer.
Once the price the underlying asset of a CBBC reaches, falls below (for Bull Contract) or rises above (for Bear Contract) the Call Price, a category R CBBC may receive a residual payment from the issuer. The residual payment is based on the minimum (for Bull Contract) or maximum trade price (for Bear Contract) of the underlying asset during the period between the occurrence of the Mandatory Call Event and the end of the next trading session, subject to the final announcement by the issuer in respect of its actual payout. In cases where the minimum price of the underlying asset of a Bull Contract reaches or falls below the Strike Price, or the maximum price of the underlying asset of a Bear Contract reaches or exceeds the Strike Price, there will not be any residual payment.
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 a small premium (which is usually the funding cost). The Strike Price can be equal to the Call Price or lower (for a Bull CBBC)/higher (for a Bear CBBC) than the Call Price. The following example illustrates how a Bull CBBC works:
| Example: Category N Bull Contract (Without residual value) |
Example: Category R Bull Contract (With residual value) |
||
|---|---|---|---|
| At the Time of issuance | At the Time of issuance | ||
• Underlying asset |
Stock X | • Underlying asset |
Stock X |
• Spot Price |
$110 | • Spot Price |
$110 |
• Strike Price (fixed at issue) |
$90 | • Strike Price (fixed at issue) |
$90 |
• Call Price (fixed at issue) |
$90 | • Call Price (fixed at issue) |
$95 |
• Funding costs |
$7.2 | • Funding costs |
$7.2 |
• Contract entitlement |
100 :colon 1 | • Contract entitlement |
100 :colon 1 |
• Expiry |
12 months | • Expiry |
12 months |
| Theoretical price of Bull Contract at issue =equal (Spot -minus Strike +plus Funding costs) /divided by Contract entitlement =equal ($110 -minus $90 +plus $7.2) /divided by 100 |
$0.272 | Theoretical price of Bull Contract at issue =equal (Spot -minus Strike +plus Funding costs) /divided by Contract entitlement =equal ($110 -minus $90 +plus $7.2) /divided by 100 |
$0.272 |
| Value of one board lot (10,000 shares) =equal $0.272 xtimes 10,000 shares |
$2,720 | Value of one board lot (10,000 shares) =equal $0.272 xtimes 10,000 shares |
$2,720 |
| If Spot Price falls to $95 | If Spot Price falls to $95 - Reach the Call Price | ||
|---|---|---|---|
| The Contract is still traded in the market as the call price has not yet been reached. | |||
• Mandatory Call Event occurs |
|||
• The Bull Contract is knocked out and trading is terminated - Residual value of the Bull Contract at Call=equal (Minimum Price1Footnote remark 1 -minus Strike Price) / divided byContract entitlement =equal ($92 -minus $90) / divided by100 |
$0.02 | ||
| Value of one board lot: | $200 | ||
| If Spot Price falls to $90 |
|
|---|---|
| If Spot Price falls to $90 - Reach the Call Price | Not applicable |
• Mandatory Call Event occurs |
|
• The Bull Contract is knocked out and trading is terminated |
|
• The Bull Contract becomes worthless |
|
| If not called before expiry |
If not called before expiry (as in Category N Bull Contract example) |
||
|---|---|---|---|
• At expiry, Closing Price of Stock X |
$130 | • At expiry, Closing Price of Stock X |
$130 |
| - Theoretical value of Bull Contract at expiry =equal (Closing Price -minus Strike Price) / divided byContract entitlement =equal ($130 -minus $90) / divided by100 |
$0.4 | - Theoretical value of Bull Contract at expiry =equal (Closing Price -minus Strike Price) / divided byContract entitlement =equal ($130 -minus $90) / divided by100 |
$0.4 |
| • Value of one board lot (10,000 shares) =equal $0.4 xtimes 10,000 shares |
$4,000 |
• Value of one board lot (10,000 shares) =equal $0.4 xtimes 10,000 shares |
$4,000 |
| • In this case, investor will receive $4,000 in cash | • In this case, investor will receive $4,000 in cash | ||
Remark(s)
1
Minimum trade price of underlying asset during the period between occurrence of the Mandatory Call Event and the end of the next trading session (there are two trading sessions on each trading day: morning and afternoon); assumed to be $92 for this illustration. In cases where the Minimum Price falls to or below the Strike Price, there will not be any residual value.