Guide for Beginners

Factors that influence the price of a CBBC are less complicated than those affecting a warrant. Underlying asset price and funding cost are the two major factors that affect the price of a CBBC. Apart from those, interest rate, dividend, premium, outstanding quantity and market supply and demand will also affect the price of a CBBC.

In fact, the exercise price and tenor of a CBBC will also affect its price. However, since these two terms would have been determined at issuance and are not subject to change during the life of the product, they only affect the price of the product as basic rather than market factors.

Different factors affect the price movement of bulls and bears differently, summarized as follows:

	Price of bulls	Price of bears
When the price of underlying assets increases	Rises	Drops
When the expiry date approaches*	Drops	Drops
When funding cost rises	Rises	Rises
When interest rate rises	Rises	Drops
When more dividend than expected is paid	Drops	Rises

As for basic factors that do not change during the product’s tenor, the impacts on CBBC pricing are as follows:

	Price of bulls	Price of bears
With bigger difference from exercise price	Higher	Higher
With longer tenor*	Higher	Higher

*CBBCs are not subject to time decay, but funding cost is deducted on a daily basis. And as interest rates remain low in recent years, funding cost takes up a considerably low proportion in the price of a CBBC. That is to say, the price of a CBBC not held for a long period is scarcely affected by funding costs. Accordingly, some information on CBBCs prevailing among investors claims that time has little impact on the price of a CBBC.