About Callable Bull/Bear Contract (CBBC)
Updated at:214 days 15 hours ago
What is Callable Bull/Bear Contract (CBBC)?
The Callable Bull/Bear Contract (CBBC) is a leveraged derivative financial product, which has two types of contracts, a callable bull contract, and a callable bear contract. If an investor anticipates an upward movement of the underlying asset, he/she can purchase a callable bull contract; if an investor anticipates a downward movement of the underlying asset, he/she can purchase a callable bear contract. Without considering other factors, if the underlying asset’s price rises, the bull contract will generally rise in value while the bear contract decrease in value; if the underlying asset’s price decreases, the bear contract will generally rise in value while the bull contract decrease in value. The strike price, call level and expiry date are fixed upon the issuing of a CBBC. When the underlying asset’s spot price hits the call level, the CBBC will be called and trading will be terminated immediately.
The CBBC is essentially a special kind of option.
For a callable bull contract, the intrinsic value is the underlying asset’s spot price minus the strike price; for a callable bear contract, the intrinsic value is the strike price minus underlying asset’s spot price. At Gate.io, the CBBC expiration date uses Hong Kong Time. If a CBBC is held until maturity, the investor only receives a return
if the settlement price is above the strike price for a callable bull contract, or is below the strike price for a bear contract. The maximum loss is limited to the investor’s entire investment capital.
When the spot price of the underlying price hits the call level, the CBBC will be called and trading is terminated immediately. In the event of a mandatory call, the investor can only receive a residual value, if there is any. To calculate the residual value, the lowest price observed during an observation period (2 hours since mandatory call is triggered in general) for a bull contract, or the highest price observed for a bear contract, instead of the call level, is used as the settlement price.
Calculate the Residual Value when a CBBC is called before maturity:
Residual Value of bull contract: (Settlement price-Strike price)/entitlement ratio
Residual Value of bear contract: (Strike price-Settlement Price)/entitlement ratio
Entitlement Ratio: represents the CBBC's exposure to the underlying asset, which is how many CBBC contracts are required to be converted to 1 unit of the underlying asset.
Gearing Ratio: reflects the gearing effect the CBBC enables at the time you purchase it.
Formula: Spot Price of the Underlying Asset/ (The CBBC’S Price X Entitlement Ratio)
Please note, the CBBC’s effective gearing may change all the time as the market price of the underlying asset changes.
CBBC Value (In theory)
for a Bull CBBC, its value is
(Spot Price of Underlying Asset – Strike Price)/Entitlement Ratio+ Funding Cost
for a Bull CBBC, its value is
(Strike Price -Spot Price of Underlying )/Entitlement Ratio+ Funding Cost
where Funding Cost=Strike Price X annualized funding rate X time until expiry
The characteristics of the CBBC:
1） Easy to trade. You can simply buy and sell a CBBC like you are buying or selling an asset in the spot market.
2） Highly leveraged: The CBBC leverage can be as high as 100x or 200X, in certain cases.
3） Lower trading fee: The CBBC trading fee is lower compared to a perpetual contract as it is charged based on the investment capital, irrespective of the leverage.
4） Callback: The CBBC can be called back. When it is called, the investor only receives a residual value if there is any. To calculate the residual value, the lowest price observed during an observation period for a bull contract, or the highest price observed for a bear contract, instead of the call level, is used.
The CBBC VS Leveraged ETF
1) The CBBC, in general, has higher leverage;
2) The CBBC does not incur any management fee.
3) The CBBC doesn’t have a re-balancing mechanism, therefore would not incur frictions caused by rebalancing. But the CBBC has a callback mechanism. Once it is called, the investor may lose a significant part, even all of his/her investment capital.
Trading Fees of CBBC:
The CBBC trading fee takes the same fee schedule as crypto-to-crypto spot market (0.2% at most). At this moment, GT debit for the CBBC trading is yet to enable. But you can use Gate.io Points to effectively lower your trading fee.