This article appeared in Capital page of The Edge Malaysia, Aug 8-14,2010
Callable Bull and Bear Certificates – Knowing the product
By Jasvin Josen
From the previous article, we now understand that Callable Bull and Bear Certificates (CBBCs) inMalaysia are actually a product of exotic barrier options. In this article, we examine the key featuresof this product and have the opportunity to work on some examples.
Essential features of a CBBCs
There are many useful sites including Bursa Malaysia that explain the dynamics of CBBC, but I findthe Hong Kong Exchange site, (http://www.hkex.com.hk/eng/global/faq/cbbc.htm) the finest as itenables a layman investor (almost) to understand the product.The key features of a CBBC are discussed below and at the same time, these features are comparedto its close neighbour, structured warrants.
Call price and Mandatory call event
From the previous article, we now know that the call price refers to the barrier level of the CBBC. Toemphasise further, for a callable bull, the call price is always set to be equal to or higher than thestrike price. For a callable bear, the call price is always equal to or lowers than the strike price.The mandatory call event relates to the termination of the CBBC when the underlying asset reachesthe call price. We will investigate this feature further when we talk about settlement price later.
CBBCs tracks the underlying asset closely
The CBBC type of instruments currently track underlying assets such as stocks, indices, exchangetraded funds and currencies. It is believed that the price of a CBBC tends to follow the price of theunderlying assets closely. In other words, its delta is close to 1. (Delta = change in option price /change in underlying share price). In the case of structured warrants, only deep in-the-moneywarrants that are close to expiry have deltas of 1. CBBCs then do appear to have a better edge as itsconstant delta enables straightforward risk management for the investor, in addition to the lowerpremium.Due to this property, this product is promoted by issuers like investment banks as the idealderivative to closely track the price movement of underlying shares, having high price transparency.However, investors are always warned that when the underlying share price is close to its call price,the value of CBBC may become more volatile and the change in its value may be disproportionate tothe change in the value of the underlying assets.