A callable bull/bear contract (CBBC) is an investment instrument that gained popularity in recent years in markets including Europe, Australia and Hong Kong. Just like warrants, CBBCs are issued with a strike or exercise price, an expiration date, a conversion ratio and other similar terms. Concept-wise, CBBCs work in much the same way as index futures to leverage on the rise or fall of a market. An investor who is bullish on a market buys a bull contract to capture its potential rise in value. On the other hand, someone who is bearish takes on a bear contract to profit from a falling market. Hence the price of a CBBC can be compared to the cost of borrowing from the leveraged instrument's issuer to buy or sell the underlying asset.

Depending on their market outlook, investors may enter a bull or bear contract in much the same way as they take up a call or put warrant. Investors must note, however, that CBBCs involves a mandatory call mechanism whereby the contracts are withdrawn from trading before expiry if the price of the underlying asset hits the "call price" or "trigger point." (For bull contracts, the trigger is equal to or higher than the strike price; for bear contracts, it is equal to or below.) When that happens, the investor may lose as much as the entire amount invested in such CBBCs.

Warrants vs CBBCs

Risks Related to CBBCs

Gearing Risk
CBBCs are a type of derivatives that uses leverage to amplify the pricing fluctuation of the underlying assets. If an investor predicts wrongly the price trend of a CBBC's underlying asset, he or she may suffer substantial losses of up to the entire invested amount. Hence investors are advised not to put all the eggs in one basket. CBBCs should make up only a small portion of any investment portfolio. As it is, given the leverage impact, holding even a relatively small amount of CBBCs is equivalent to having exposure to the rise or fall in pricing of the underlying asset.

Expiry Time Horizons
CBBCs have expiry dates after which they become worthless. For long term investing, Investors should pick those with longer lifespans or sustainability. If you are holding a CBBC expiring in a relatively short time, consider selling earlier or switching to one with similar characteristics but a longer lifespan.

Mandatory Call Mechanism
When the call price is reached, the issuer will call the CBBC. Trading stops and the settlement process starts. Even if the underlying asset bounces back in the right direction, such a CBBC will not resume trading. If the settlement price is determined to be equal to or less than the strike price, no residual payment will be paid out so the investor's loss will be the original invested amount. The closer a CBBC approaches the expiry date, the more volatile its theoretical price will be.

Interest Rates
Interest rate fluctuations will have an impact on CBBC pricing. In theory, an interest rate uptrend will raise the pricing of bull contracts but impact negatively on that of bear contracts. Having said that, unless interest rates become very volatile or the investor holds a large inventory, the impact of rate changes is less than some other market factors on CBBCs.

Issuer Default
CBBC investors are considered unsecured creditors and cannot lay any preferential claim to assets held by the securities' issuer. So, if a CBBC issuer becomes insolvent and defaults on its listed securities, holders of such contracts may lose their entire investment. When choosing a CBBC, investors are advised to check the financial capability and credit worthiness of the issuers. For a review of issuers' credit rating, please check out HKEx's Issuer and Liquidity Provider Information.