Suppose we make bread with the same amount of flour...
  • Entitlement ratio is the number of units of CBBCs needed for controlling one share. Because different stocks have different share prices, entitlement ratios are needed to lower the face value of a CBBC by division, so as to achieve the effect of investing a small amount for a big return.

  • In general, the entitlement ratios of stock CBBCs are 1:1, 5:1, 10:1, 50:1, 100:1 and 500:1. If the issuer's corporate actions necessitate an adjustment of the entitlement ratio of stock CBBCs, other ratios may be adopted.

    The entitlement ratio for indices is a multiple of 10. Ratios of 10,000:1, 12,000:1 and 20,000:1 are commonly seen in the market.

  • If two stock CBBCs have the same underlying assets, call prices, exercise prices and expiry dates but different entitlement ratios, the effective gearing will not be affected. For example, for two Tencent bulls with a call price of $350 and an exercise price of $347, the one with an entitlement ratio of 500:1 has a similar gearing to that with an entitlement ratio of 100:1.

    What the entitlement ratio affects is mostly the face value of CBBCs. Assuming that other terms are the same, the face value of the Tencent bull with an entitlement ratio of 500:1 in the above example will be one fifth of that with an entitlement ratio of 100:1. Another example: for two HSI bulls with the same call price, exercise price and expiry date, the face value of the one with an entitlement ratio of 20,000:1 will be half of that with an entitlement ratio of 10,000:1. In addition, entitlement ratio also influences the movement sensitivity of a product, as detailed below.

Consolidate your memory immediately!
Assuming that their call prices, exercise prices and tenors are the same, the price of an HSI bull with an entitlement ratio of 12,000:1 is lower than that with an entitlement ratio of 10,000:1
but
than that with an entitlement ratio of 20,000:1.
Why can CBBCs which are generally priced from several to tens of cents be linked to underlying stocks worth several or even hundreds of dollars?
Understanding CBBC Terms One by One
(1) Call Price and Exercise Price (2) Expiry Date (4) Gearing
Correct!
The higher the entitlement ratio, the smaller the face value of a product.
Wrong!
The higher the entitlement ratio, the smaller the face value of a product.