CBBCs’ prices are generally higher than the calculated intrinsic values, mainly because certain funding costs are included.
The sale of CBBCs by issuers is similar in nature to the provision of a margin financing (in the case of bulls) and lending stocks for a short sale (in the case of bears), hence the issuer charges certain funding costs as part of their own costs. Methods to calculate funding cost vary with different borrowing rates used by the issuers.
In general, the longer the tenor of a CBBC, the higher its funding cost will be, with the funding costs reducing gradually as the products approach expiry. Funding cost reaches zero when a CBBC expires or is called back.
The premium of a CBBC can be considered as the actual value of the CBBC’s funding cost collected by the issuer. Actually, such funding cost is not merely the borrowing cost; it also contains the hedging cost charged by issuers, as well as certain ex-dividend factors in the underlying assets before expiry.
Generally speaking, the higher a CBBC’s premium, the higher its funding cost will be. But price comparison only makes sense when it comes to CBBCs with the same terms. A large difference between the expiry dates of two CBBCs means different ex-dividend levels of the underlying assets before expiry, which could result in different premiums of the CBBCs, making it hard to make a direct comparison between them. But all in all, once a CBBC is called back before expiry, investors who hold CBBCs with the same terms but lower premium suffer less loss.