The purchase of CBBCs is actually equivalent to borrowing money from the issuer to buy the underlying assets. After the underlying assets are sold to lock in profit, how many bulls should be bought so that they can be equivalent to the underlying assets for which profits have been locked in? The formula is as follows:
The number of bulls to be purchased = number of underlying assets x entitlement ratio of CBBC
For example, say an investor holds 2,000 AIA shares, and intends to continue to benefit from the potential increase after the profit is locked in. Using a 100:1 AIA bull for hedging, the number of bulls to be purchased is
2,000 x 100 = 200,000
Since the theoretical value of a bull is the difference between the spot price and call price, the cost of buying 200,000 AIA bulls is lower than that of 2,000 AIA shares. Therefore, the investor can benefit from the trend of the underlying assets at a low cost. When the price of the underlying asset rises, the investor can profit from the bull; if the price of the underlying asset drops, because the profit has been locked in for underlying assets and the maximum loss under a bull is merely the principal, the maximum loss of the investor is limited.