Derivative Warrants and Callable Bull-Bear Contracts (CBBCs)
Derivative Warrants and CBBCs are one of the most active investment instruments in market.
Derivative warrants can be issued over a range of assets, including stocks, stock indices, currencies, commodities or a basket of securities. They are issued by a third party, usually an investment bank, independent of the issuer of the underlying assets. Derivative warrants are an instrument that gives an investor the right to “buy” or “sell” an underlying asset at the pre-set price prior to a specified expiry date. They can be bought and sold prior to their expiry in the market provided by Hong Kong Exchanges and Clearing Limited (HKEx). At expiry, settlement is usually made in cash rather than purchase or sale of the underlying assets. Derivative warrants are generally divided into two types: calls and puts.
Callable Bull-Bear Contracts (CBBCs)
CBBCs are leveraged investments tracking the performance of the underlying assets without requiring investors to pay the full price required to own the actual assets. They are issued either as bull or bear contracts, allowing investors to take bullish or bearish positions on the underlying assets.
CBBCs are issued with the condition that during their lifespan they will be called by the issuers when the price of the underlying assets reaches a level (known as the Call Price) specified in the listing document. If the Call Price is reached before expiry, the CBBC will expire early and the trading of that CBBC will be terminated immediately. The specified expiry date from the listing document will no longer be valid.
A Category N CBBC refers to a CBBC where its Call Price is equal to its strike price, and the CBBC holder will not receive any cash payment once the price of the underlying assets reaches or goes beyond the Call Price.
A Category R CBBC refers to a CBBC where its Call Price is different from its strike price, and the CBBC holder may receive a small cash payment (called "residual value") upon the occurrence of a mandatory call event but in the worst case, no residual value will be paid (Category N CBBC do not have residue value).