Saturday, July 17, 2010

CIMB's Callable Bull-Bear Certs - Nice One

CIMB yesterday launched the first callable bull-bear certificates (CBBCs) on Malaysia's national stock exchange. The initial four CBBCs start trading today and will allow investors to bet on four popular local stocks: AirAsia, Gamuda, Genting and Berjaya Corporation.

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"Malaysia is the first country in Southeast Asia to introduce CBBCs," said Charon Wardini Mokhzani, deputy chief executive of corporate and investment banking at CIMB, in a speech. "Our launch of CBBCs today is yet another example of innovation in exchange-traded products, designed to give investors more choice. It is not a substitute but a complement to all the other exchange-traded products we have."

Hong Kong pioneered the trading of CBBCs in Asia back in 2006. At the time, few participants expected the contracts to be popular in a market already dominated by warrants, but the timing turned out to be perfect to catch the rise in volatility during the height of the financial crisis - which made it expensive to buy warrants.

CBBCs, which are a kind of barrier option, are also simpler than warrants. Investors pay a small premium to buy a fixed-term contract that represents a bet on the direction of the underlying stock or index - either up or down. Depending on how far the strike is from the spot level, the contract can offer leverage of six times or more, but the investor is only on the hook for his initial investment. The contracts are callable, which is to say that they can terminate early if the underlying moves too far in the wrong direction.

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Hong Kong's move into CBBCs has proven a profitable one. Most exchanges around the world are struggling to make money with lower trading volumes, lower margins and reduced profits as a result of the global financial crisis and the introduction of alternative trading systems - and at a time when new regulations and risk management issues are likely to impose additional challenges.

At Bursa Malaysia operating revenues have dropped by roughly a third since the peak of 2007, but in Hong Kong the drop-off from 2007 has been somewhat mitigated by the addition of new products such as CBBCs, which together with warrants now account for about a quarter of the trading on the exchange.

Bursa Malaysia will hope to replicate some of that success, though it remains to be seen if investors will embrace CBBCs in a market that is becoming less volatile and more friendly towards warrant investors.

2 comments:

K C said...

I like structured warrants (SW) because often you can find some mis-pricings and seemingly money making opportunities where there is no premium (and no foreseeable dividend declaration of underlying shares)exist for the SW, even though it has a few more months to expire (free time value too). One can at least value SW with option pricing models and judge whether it is worthwhile to gamble or not, although the 'fair' price may not be fair because of the various unrealistic assumptions in the model. As for CBBC, valuation becomes more complicated. Why go for something complex when there are so many simpler SW around to gamble? It is just like betting off-the-stake in a golf game with a much lower handicapper, the investment bank.

emacro said...

Of the 4 counters mentioned Genting Bhd cbbc may have a chance of working. For gamuda, bjcorp, airasia, low priced stocks with lower volatility means the chances of cbbc being popular is lower. You need to have high price liquid stocks for derivatives to be worthwhile and tradable.

Just like the FBM KLCI ETF, the pricing is all wrong, being priced at RM1.30s, the price should be RM13.30s to make it volatile and more tradable.... bursa are you listening?