Aug 11, 2023
CBBC is modern derivatives that limit stakeholders risk with several finance scheme. Before CBBC there is unlimited liability in leveraged trade but after CBBC there is limited liability in leveraged trade.
※This article is not intended to reccomend any financial products.
Pro for CBBC
CBBC and Warrent shows market expectation and sentiment for future of underlying stock.
-Low entry cost; stamp duty exempted because there is no acctual stock trade; as straightforward to cash(ordinary stock trade have 3 days transfer period)
-Maximum loss will be limited to initial investment; No margin calls
Con for CBBC
The issuer of CBBCs still carries some credit risk. While it is true that the issuer’s risk is limited compared to the traders and market makers, there are still potential risks involved:
1. Counterparty risk: The issuer is exposed to the risk of default by the counterparty, i.e., the underlying security holder. If the counterparty fails to fulfill its obligations, the issuer may face financial losses or challenges in meeting its own obligations to CBBC holders: find another stock holder and pay even higher stock interest.
2. Operational risk: The issuer may face operational challenges in managing the CBBCs, such as errors in pricing or settlement processes, which can lead to financial losses or reputational damage.
3. Market risk: Although the issuer is not directly exposed to the price change risk, extreme market conditions or unforeseen events can impact the overall market and potentially affect the issuer’s financial stability. Market risk is basically transferred to traders and market makers.
If outstanding share volume or CBBC out in Market (%) is small or trader volume is too small, then there will be more risk to market maker and trader. In such case there is limited merit of CBBC but currently CBBC is only used for large popular stock so this demerit is not realized.