Guide for Beginners

Now you've learned the basics about a warrant and a CBBC, you can compare the features of these two products:

On the whole, warrants have more choices on underlying assets and no call feature; but they are affected by implied volatility and subject to daily deduction of time decay. CBBCs have less choice on underlying assets and a call feature; but their prices are not affected by implied volatility and they are only subject to a small funding cost deduction.

Investors considering derivatives are often faced with the choice between a warrant and a CBBC. In fact, it is hard to pass on an absolute judgment as the two products have their own pros and cons. Investors should utilize both instruments flexibly in accordance with market conditions.

In a volatile market, most investors tend to use warrants since CBBCs have a higher risk of being called back. Additionally, the implied volatility of a warrant is likely to increase when the volatility of the underlying asset increases, from which, therefore, the warrant price will benefit.

While in a ranging market, most investors turn to CBBCs as the risk of being called back is lower, whereas the implied volatility of a warrant puts the warrant at risk of “warrant shrinkage”.

In addition, if investors intend to make medium- and long-term investments, CBBCs are more frequently used for this purpose because, unlike warrants which have daily time decay, CBBCs are unaffected by this factor, with only a small amount of funding cost deducted during its tenor. To avoid increasing the risk of a call event brought about by short-term volatility, some investors may pick CBBCs with medium to further call levels for medium- and long-term investments, so as to track the underlying asset price trend for a period of time.