Guide for the More Experienced

Want to reduce the risk of a mandatory call event and also want a high leverage?
  • When investors are choosing an HSI CBBC, they usually look at the call price and assess the risk of a mandatory call event to select products. In CBBC: Guide for Beginners, we understand that products with prices closer to the spot price are higher in leverage because of a higher risk of a mandatory call event. However, is there a way to achieve the best of both worlds - to reduce the risk of a mandatory call event and achieve corresponding leverage?

    Perhaps one way is to pay attention to the difference between the CBBC’s call price and exercise price. CBBC: Guide for Beginners has explained that the difference between the exercise price and spot price is the theoretical value of a CBBC. As shown in the example in the diagram above, since the exercise prices of two bulls are the same, their theoretical prices are exactly the same, that is, the leverage is theoretically similar. However, if the bull with a smaller difference between the call price and exercise price is selected, the risk of a mandatory call event can be slightly reduced.

    In other words, the smaller the difference between the call price and exercise price, the smaller the risk of a mandatory call event of the CBBC, but the leverage obtained will not be reduced.

    “Two CBBCs with same strike price and same theoretical price…
    Select the one with narrower margin between call level and strike level will mitigate the call risk”

  • The mainstream products in the CBBC market are those with a difference of 100 points between the call price and the exercise price, which is almost the smallest difference you can get in a product. Since CBBCs are a leveraged product, investors who use them are usually more aggressive and want a higher leverage. However, in addition to products with a difference of 100 points, there are also CBBCs with a difference of 150 points and 200 points on the market.

    For investors, if they want to be more aggressive, they will usually pay more attention to CBBCs with narrower differences between the call price and the exercise price. However, if the product is unfortunately called back, the possibility of rising above or falling below the exercise price will be higher, and henc e the chance of obtaining some residual value after settlement will also be lower. Conversely, CBBCs with a greater difference between the call price and exercise price will have a higher chance of recovering some residual value after being called back, so perhaps they are more suitable for conservative investors.

    In addition, the market also has a small number of CBBCs whose difference between the call price and exercise price is 0. They belong to the Category N CBBCs, that is, products that have no residual value after being called back. Note that the premium of a Category N CBBC is generally higher because the issuer needs to raise the funding cost to reflect higher hedging costs. Therefore, even if the difference is 0, the leverage may not be higher than a Category R CBBC with the same call price and difference between the call price and exercise price.

Consolidate your memory immediately!
Difference between the call price and exercise price Bulls'
gearing
Bears'
gearing
100 points Higher
200 points Lower Lower
For a 10000:1 HSI CBBC, is it not the case that when the futures index moves by 10 points, the CBBC moves by 1 tick? What factors affect the movement sensitivity?
Correct! 
For bulls or bears with the same call price, the greater the difference between the call price and exercise price, the higher the theoretical price of the product and the lower the gearing.
Wrong!
For bulls or bears with the same call price, the greater the difference between the call price and exercise price, the higher the theoretical price of the product and the lower the gearing.