In a nutshell

Callable bull/bear contract (CBBC) is a financial derivative that provides a leveraged investment in the underlying assets. CBBC has a mandatory call mechanism. When the price of the underlying asset reaches the call price (before the maturity date), CBBC will be called and the trading will be terminated. Please make your investment decisions with caution.

How is CBBC named

"BTC-20DEC-14550C-A" as an example: "BTC" means the underlying asset is BTC_USDT spot index. "20" refers to the maturity year 2020. "DEC" means the maturity date is in December. "14550" is the strike price. "C" is short for "call" while "P" is short for "put". "A" indicates that the same issuer has issued multiple BTC CBBCs that expire in the same month but with different terms. "A" is used to mark the difference.

Definitions and formulas

Strike price: If the CBBC is held until expiry, the strike price is the exercise price at which the investor will buy or sell the underlying asset to exercise the contract. In practice, investors will receive the settlement payment directly.

If a CBBC is called before its maturity date, the strike price will be used as the criterion for judging whether the CBBC has residual value - if the strike price of a callable bull contract is lower than the lowest market price of the underlying asset during the observation period, or the strike price of a callable bear contract is higher than the lowest market price during the observation period, then there is residual value.

Call price: CBBC has a mandatory call mechanism. When the price of the underlying asset reaches the call price, the contract will be forcedly exercised. Called bull/bear contracts cannot be traded anymore.

Maturity date:If a CBBC is not called before its maturity date, it will be called at a certain time (normally 16:00 HKT) on the maturity date by the issuer.

Ratio: Entitlement ratio refers to the number of CBBCs can be purchased in exchange for 1 unit of the underlying asset.

Let's suppose the ratio is 5000. It means 5000 CBBCs can be exchanged for one unit of the underlying asset. The entitlement ratio is important for the denomination of each CBBC. The lower the ratio, the higher the denomination.

Gearing ratio: The actual leverage ratio of CBBC.

The formula for calculating gearing ratio:

Gearing ratio = last price of the underlying asset's spot index/(last price of CBBC × entitlement ratio)

When the price of the underlying asset varies by 1%, theoretically the callable bull contract with 10-time gearing ratio would rise by 10% and the callable bear contract with 15-time gearing ratio would fall by 15%. The higher the gearing ratio, the higher the risks.

Breakeven point: The point where the market price of CBBC is equal to the original cost.

How to calculate the breakeven price:

Breakeven price of callable bull contracts = strike price + last price * entitlement ratio Breakeven price of callable bear contracts = strike price - last price * entitlement ratio

Distance To Call Price%:

The difference between the current market price and the call price as a percent. Distance To Call Price% = ABS(spot index - call price)/call price * 100%

Price of CBBC: The price of CBBC consists of its intrinsic value and the issuer's financing cost.

Formulas for calculating intrinsic value: Intrinsic value of callable bull contracts = (spot index - strike price)/entitlement ratio Intrinsic value of callable bear contracts = (strike price - spot index)/entitlement ratio

Financing cost:The cost generated to issue CBBC, which is included in the price of CBBC and becomes less as the CBBC approaches maturity date.

How to calculate financing cost:

Financing cost generated from issuing CBBC = (strike price/entitlement ratio) * annualized financial rate * (until maturity date count/365) The annualized financial rate is normally 7.3%, which is, however, subject to actual market conditions.

Premium: Premium can be seen as the cost of funds charged by the issuer from investors of the CBBC.

How to calculate the premium:

Premium of callable bull contracts = (last price * entitlement ratio + strike price - spot index price)/spot index price * 100% Premium of callable bear contracts = (last price * entitlement ratio - strike price + spot index price)/spot index price * 100%

Mandatory Call Event: Once the price of the underlying asset reaches the call price, the CBBC will be called and the trading will be terminated immediately. Even if the price bounces back shortly after, no more trades can be made anymore. If it is determined that the CBBC of the investor has residual value, the residual value will be transferred to the investor.

Mandatory call observation period: The settlement is not made immediately after a CBBC has been called, but after a certain observation period, which is used to determine the residual value and the settlement price. The length of the observation period is normally but not always 4 hours. Please refer to the issuer of the CBBC for more accurate information.

Residual value:If the strike price of a callable bull contract is lower than the settlement price, or the strike price of a callable bear contract is higher than the settlement price, then there is residual value in the contract; if not, there is no residual value. CBBC cannot generate negative residual value.

How to calculate residual value:

Residual value of each callable bull contract = (settlement price - strike price)/entitlement ratio Residual value of each callable bear contract = (strike price - settlement price)/entitlement ratio Total residual value transferred to the investor = residual value of each CBBC * total amount of CBBC

Settlement price: If a CBBC is called before its maturity date, the settlement price is the lowest (for callable bull contracts) or highest (for callable bear contracts) recorded price of the underlying asset during the observation period.

How to calculate the settlement price:

Settlement price of callable bull contracts = Max(lowest spot index price in the observation period, strike price) Settlement price of callable bear contracts = Min(highest spot index price in the observation period, strike price) If a CBBC is held until its maturity date, the settlement price will be the average of the per-minute spot index price of the last 10 minutes before the termination of trading.

Settlement upon maturity: If a CBBC is held until its maturity date, the settlement price will be the average of the per-minute spot index price of the last 10 minutes before the termination of trading. The settlement will be returned to the investor.

How to calculate residual value:

Residual value of each callable bull contract = (settlement price - strike price)/entitlement ratio Residual value of each callable bear contract = (strike price - settlement price)/entitlement ratio

Handling fees: Handling fees for CBBC trading on Gate.io is the same as that of spot trading. The handling fee rate is 0.2%, which can be paid with Gate points, but not with GateToken yet. VIP tiered discounts are also applied to CBBC. (VIP discounts are not compatible with Gate points.)