Callable Bull/Bear Contracts & Warrants

What is CBBC?

Like derivative warrants, CBBC are structured products. They are leveraged investments that track the performance of the underlying assets without requiring investors to pay the full price required to own the actual assets. They are issued either as Bull or Bear contracts, allowing investors to take bullish or bearish positions on the underlying assets.

CBBC may be issued with a lifespan of 3 months to 5 years and are settled in cash only. CBBC are issued with the condition that during their lifespan they will be called by the issuers when the price of the underlying assets 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.

 

What are the characteristics of CBBC?

CBBC have a mandatory call mechanism, that is, if the underlying asset’s prices reach the call price, the issuer must then call the CBBC. The residual value depends on the categories of CBBC, which are namely category N CBBC and category R CBBC.CBBC can be divided into two categories: Bull Contracts and Bear Contracts. If investors take bullish position on the underlying asset, then choose Bull Contracts; if you take a bearish position, you can choose Bear Contracts.

A Category N CBBC refers to a CBBC where its Call Price is equal to its strike price, and the CBBC holder will not receive any cash payment once the price of the underlying assets reach or go beyond the Call Price.

A Category R CBBC refers to a CBBC where its Call Price is different from its strike price, and the CBBC holder may receive a small cash payment (called "residual value") upon the occurrence of an mandatory call event but in the worst case, no residual value will be paid (Category N CBBC do not have residue value).

Reference:

Hong Kong Exchanges and Clearing Ltd.

What are Warrants?

Warrants are an instrument which gives investors the right - but not the obligation - to buy or sell the underlying asset (e.g. a stock) at a pre-set price on or before a specified date.

How many types of Warrants are there in the market?

There are two main types of warrants: subscription warrants and derivative warrants.

Subscription warrants are issued by a listed company and give holders the rights to buy the underlying shares of the company. They are either attached to new shares sold in initial public offerings, or distributed together with declared dividends, bonus shares or rights issues. Subscription warrants are valid between 1 and 5 years. Upon exercise, the underlying company will issue new shares and deliver them to the warrant holders.

Derivative warrants are issued by financial institutions. Unlike subscription warrants which must be call warrants, derivative warrants can be call or put warrants. Most of the derivative warrants in the market have a shorter life, ranging from 6 months to 2 years normally, although the current Listing Rules allow a maximum life of 5 years.

What are Call Warrants and Put Warrants?

Holders of call warrants have the right, but not obligation, to purchase from the warrant issuer a given amount of the underlying asset at the exercise price within a certain time period.

Conversely, holders of put warrants have the right, but not obligation, to sell to the warrant issuer a given amount of the underlying asset at the exercise price within a certain time period.

Derivative warrants are “exercised” when holders use their rights to purchase or sell the underlying assets. In Hong Kong derivative warrants are usually settled in cash when they are exercised at expiry dates.

Reference:

Hong Kong Exchanges and Clearing Ltd.