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DWhy traders resent the emerging markets raUy PAGEn

Property prospects

SUNDAY MORNING POST MAY 24 2009

15 no a lg d bull- shy

callable bull contract Underlying asset price - Strike price Underlying asset price - Strike price + Finance cost

Underlying asset Mane Seng Index -- --- + Fmance cost - Entitlement ratio Entitlement ratio

Value of HSI at time of purchase of contract 15000 15500 - 10000 14500 - 10000

= HK$OOl + HK$O01Strike price 10000 Finance cost (per CBBC) HK$OOl 10000 10000

middotmiddot caifmiddotprit~~~i~~~_~~~middot middot~nt~middotI~~~~~~~== _ bull - __~ _ LJ= HK$056 (to rise) HK$046 (10 fall)

SMI R~PlU(

A tricky derivative for the II

Market Mood

with hul Porrg Investment analyst and head of Pegasus Fund

You should aware that

- fttnakingasevece battering last year he mainland propeny market is becoming popular with Investors

again Stocks ofsome smallmiddot and medium-sized Chinese property developers in particular have risen substantially onate

Beijings policies arc clearly boosting housmg demand as dara shows sales haveincreased over he pasl few months

Data released bv the National Bureau OfStdtiSticSshows property prices fell last month on a yearly basisThe price ofhome sales io 70 cities decreased by 11 per cent year on year But housing sales figures recently released by property developers show signs ofpromise

Total sales ofChina Overseas last month rose 115 times while volume increased 149 times vear 00 year The contracted saleS revenue ofChina Resources Land laslmonth amounted to 66 billion vuan (HK$75 billion) an increase of62 times year on yearAnd SinoshyOcean Land had already generated 60 per cent of its full-year sales target by May - a record amount

In the past few months several property developers have successfully cleared their inventories and srrengtllened their cash flow With the recovery ofthe ~ propertymarketj n I h fimt shy

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caBC value

Underlying asset pr ce - Strike price + Finance cost

Entitlement ratio

15500 - 10000 i HK$OOl

10000

HK 056 (10 ri ) 5 ~APtll(

Callable bull contract Underlying asset Han 5 ng Index

value of HSI at time of pwrchase of contract 15000 ------~---

Strike price 10000 Finance cost (per CBBC) HK$OOl (akiirlceuoOO middotEntiimiddotiementratio 1laquo(000

Underlying asset price - Strike price -

Entitlement ratio Finance cost

14500 - 10000 + HK$OOl

10000

= HK$O46 (100 II)

A tricky derivative for the tnarkets ups and downs

CBB i a bi m re comp icat Por more lughl gear than the CBBCs eve) underlyingasset particularly in thal n e or fall more j wly In ourAlan Alanson deciphers the callable the case ofthe mo l popular underlyshy example the CBBC with the strike ingassets like the HSI there are loads price of 1(000 i leslt highly geared ofdilferenl CBB ~ to choose from than the CBse with thestrike price ofbullbear contract in the first of a new In OlJr example of a csse linked 14000 More gearing means more to the HSI with a strike price oflOOOO risk and more potential rewards and CI hypothetical inde price of So like all uerivative products youseries as Road Warrior takes a break 15000 a 3 per cellt change in the can mak and lose money with index translates iDlO II 0 per cent nBCs la l BUl you can only lose gain in this CBBes valu what you inves( in the firsl place

One ofthe mo t popularin shy of the strike price not the call price CBBC for a very hart timeThey can Now if the strike price is much WiU abighly geared CBBC this could velitmem products in The call price t lIs you wh n it will be be bought anrl sold on the marke t closer to the index value say l4000 happen qUIckly bUl theseare nOI deshyHong Kong is the CBBC - called and the slrikc price tell you and a ommon trategy is to buy a the changes in value are even funher signed 10 bt long-umn investmeuts the callable bullbearcon- whallLis WOr1l1 when it b called bull CBBC wail until it increases in magnified In the above bull CBBC And like all dcrivativ s SBes and tract This is omething The finance cost is a charge that value and then ell it On a ingle day example it the index is at 15000 and their risks are complicated

you cau buy online like you would gets added to t he CBBes spot price for example the IISl cmlltl easily rise the LBBC has a ltrike price of14000 If you are considering tllis prodshybuy toro But ills not a share nora It covers the i su(s cO ts for creating 500 pows If the index goes from il will be worth IIKSOll U the lruIex uct ta e Ihigt article as a starting hondlt is a delivative contr8lt the CBBC and vanes from time to 15000 to 15SOO this 3 percenl gain risesw15500 theCBBCwillbewonh point type every term and every

ACBnC j similar to a warrant an time tending to decrease the closer on the index would translate into an lIK$Ol6 A3 percent rise in the vWue phra~e into Google go talk to your option or a forward conlraCI - nOI the CBSC ts to its expiry date almostlO percentgainin the value of of the HSl would translate into a 45 broker and grill him or her on how reallvan asset in the convent1onal Thc exprry date i~ the end of the our hypothetical CBBC using the forshy per cent ri e in this HBCs valli bull CBSCs work TIlen pick a few CBBCs sense of the word but a contract that U~ of the CBSC and at that time the mula to calculate the CBBCsprice The closer the strike price is to the that suit vou and read aD the details you can buy and sell It value is de shy residual value is calculated by refershy But ofcourse th~ works fine if the undedyingruiCt value the higherUl Onceyou have done aU that ifyou lermined among other thinr by the ence to the strike price HSJ doe iner 3 e Ul value Ii and the larger the potential reshy understand it and you like the Ii I performanceofan asset it is linked pound0 The entitlement ratio represent In the same way that percentage wards Butofcourse ifthestrike price rewud balance go for it But if anyshyAnd the ass I thalll10st CBBCs tradshy the CBOCs exposure to the wlderlyshy increase jn thevalue oftlle CBBC are is close to the undedying asset price thing se ms conru~illg it iii a good ed in Hong Kong are linked [0 is the lng asset Uthis ratio 10 ou would greater than percemage mcreases m then the chance thai be underlying sign this (s not the product foryou Jiang Seng Index need to buy10 CBSCs to have one-to the value of the HI 0 are losses asset price hits (he call price and the

The bull bear part describes two one exposure t the underlying asset Imagine the index does not rise and contract is terminated i abo higher writ toUS different product that can also be I the tmderlying asset is a share thai you do not get the chance to nO for a This amplification of risk and re 00 you thInk cBees are a called a callable bull contract and a i worth HK$200 and the trike price profit Tfthings go badly and the lSI ward is known as gearingn The good product Send 10Ul

c-illable bear contract A HSI callable ofa bull CBSG isHK$lOO the value of drops lhe contract will be called and CBBO that nse or fall in value faster comments and Queries to bull contract rises m vWue ifthe iod x the CBBC is asi ally the diiferpoundnce you will receive the residual value - relative to their undedying as ct are yourmoneyScmpcom rises and a H ) callable bear contrnCt or HK$IOO If the entitlement mtio i generally the difference between the rises in value ifit falls call price and the trike price __

The callabl part is one of the Say the TlSI drops 4000 points or ~ key thiugs that ~ets a CBBC aparl ABBe not ill e an 27 per cent U Ing the same fum1Ula frOID imilar derivative products your CBBC has dropped 80 per centa C lulator it willsuch as warrants If the value of the from HK$051 to 111($010 underlyingassel hits a predeter shy Now ifyou think the HST is goingnot be worth 1csmined strike price the bank that to drop you buy a bear CBBC If the LltsUed it gets to call the CBBe Ibat than zero so Oll will indeJt i at 15000 the value of a bear means the holder of the CBBC has to CBSC I its strilce price les 15000 give it back to the i uer and (he coushy n verI e1110r than plus finan costs So the lower the tract is over the CBBC i gone index goes the greater the value of

)fyou think the HSI will rise you yo 1have inve ted the contract Just like with II bull might buy a callable bull contra t If CBBC if Ihe inde move in lb the HSI ri e5 you hould bc able 10 wrong direction which in the case of sellit at aprofil But ifthe HSI falls the L the CBBC would be worth IIK$lOO a bear CBRC would be upwards the CBBG value will also drop givlOg If the entitlement ratio i 100 Ihe bear CBBC loses value U the indeshyyou the option to sell it and take the CBBC iswonh HK$1 ifit is 1000 then moves upwardgt for long enough the loss or perhaps hold on in the hope HK$O 10 and 0 on contract will be called and you may that the IISl will recover Assume you buy a callable bull be left with some residual value

811 t if the CBBC ha~ a call price of contract with the H I as the underlymiddot One slighllwist if the cal ulauon say liOOO and the HSl falls to nooo ing asset Say the lIS is at 15000 ar of residual valu Is that although the you no longer h ve the option of the tim ofbuyingit thestrike price is contract will be called if the inde holding onto the contract Instead 10000 the call plice i 11000 the reaches tl e call price th residual the issuerwill callil back and you will finance costperCBBC is HKSOOl and value is nOi calculated immediately have lost your in~unent the entitlement mtio u10000 In the case of a bull contract the

CBaCs also have a number of As this is a bull contract you underlying aliSet price used to calcushyother importan t features that need to would buy It if you antiCipate the HSI late the residual value is the lowest be understood if you want to huy Is going to rise If (he IIST is at 15000 alue of the aiset in the tradingsesshythem Th se are spot price strike when you buy the CBBC its value sian during which the SBC is called price finance COSt expiry date enshy would be 15000 less the trike price and in the following sian titlement ratio and underl~~H asMt diVided by the entitlem nl ratio plus So in our bull CBBe if it is called

Spot pTi e is what it ac ycosts the finance cost when the II I is al 11000 but later to buy or sell the CBnC I I e strike That works ul to be HK$O51 - that day It hits 9900 the reSIdual price is a bit more confu ing It is that is what this CBSC is worth when value wil be zero 11 is nQt like an linked to the coocept of residual you buy it That does nOI of cours accumulator - a CBBG will not be value The residual value is what the mean you can go buy one for worthless than zero so you will never CBBC is wurth niter Jl js called So in HK$05L lhere will be a minimum lose more than you have invested our example if the call price i 11000 number ou need to buy caned a But the residual value can evaporate and the HSI fulls to llOOO the CBBC board tot of 10000 ~y But till the if the markel contmues to move in will be called Bur if the strike price entry price if you jusI buy one board the wrong direction 10000 the CBBG may have some reshy lot on this imaginary CBSC a rela- Searin mind 1am using a theoretshysidual value This is because th reshy tivelysmallHKSSlOO ical CBBC 10 Illustrate how these sidual value IS calculated on Ihe basis Gen rcillY in~~~will~o~ru~y~h~o~ld ~~yen~O~ T~h~e~a~c~t~u~a~l~w~o~rl~d~o~t~~_~~l~m~g~s rk~~ ~~~~~~~~~~~~~~L-~~~~~~~~1II

---

caBC value

Underlying asset pr ce - Strike price + Finance cost

Entitlement ratio

15500 - 10000 i HK$OOl

10000

HK 056 (10 ri ) 5 ~APtll(

Callable bull contract Underlying asset Han 5 ng Index

value of HSI at time of pwrchase of contract 15000 ------~---

Strike price 10000 Finance cost (per CBBC) HK$OOl (akiirlceuoOO middotEntiimiddotiementratio 1laquo(000

Underlying asset price - Strike price -

Entitlement ratio Finance cost

14500 - 10000 + HK$OOl

10000

= HK$O46 (100 II)

A tricky derivative for the tnarkets ups and downs

CBB i a bi m re comp icat Por more lughl gear than the CBBCs eve) underlyingasset particularly in thal n e or fall more j wly In ourAlan Alanson deciphers the callable the case ofthe mo l popular underlyshy example the CBBC with the strike ingassets like the HSI there are loads price of 1(000 i leslt highly geared ofdilferenl CBB ~ to choose from than the CBse with thestrike price ofbullbear contract in the first of a new In OlJr example of a csse linked 14000 More gearing means more to the HSI with a strike price oflOOOO risk and more potential rewards and CI hypothetical inde price of So like all uerivative products youseries as Road Warrior takes a break 15000 a 3 per cellt change in the can mak and lose money with index translates iDlO II 0 per cent nBCs la l BUl you can only lose gain in this CBBes valu what you inves( in the firsl place

One ofthe mo t popularin shy of the strike price not the call price CBBC for a very hart timeThey can Now if the strike price is much WiU abighly geared CBBC this could velitmem products in The call price t lIs you wh n it will be be bought anrl sold on the marke t closer to the index value say l4000 happen qUIckly bUl theseare nOI deshyHong Kong is the CBBC - called and the slrikc price tell you and a ommon trategy is to buy a the changes in value are even funher signed 10 bt long-umn investmeuts the callable bullbearcon- whallLis WOr1l1 when it b called bull CBBC wail until it increases in magnified In the above bull CBBC And like all dcrivativ s SBes and tract This is omething The finance cost is a charge that value and then ell it On a ingle day example it the index is at 15000 and their risks are complicated

you cau buy online like you would gets added to t he CBBes spot price for example the IISl cmlltl easily rise the LBBC has a ltrike price of14000 If you are considering tllis prodshybuy toro But ills not a share nora It covers the i su(s cO ts for creating 500 pows If the index goes from il will be worth IIKSOll U the lruIex uct ta e Ihigt article as a starting hondlt is a delivative contr8lt the CBBC and vanes from time to 15000 to 15SOO this 3 percenl gain risesw15500 theCBBCwillbewonh point type every term and every

ACBnC j similar to a warrant an time tending to decrease the closer on the index would translate into an lIK$Ol6 A3 percent rise in the vWue phra~e into Google go talk to your option or a forward conlraCI - nOI the CBSC ts to its expiry date almostlO percentgainin the value of of the HSl would translate into a 45 broker and grill him or her on how reallvan asset in the convent1onal Thc exprry date i~ the end of the our hypothetical CBBC using the forshy per cent ri e in this HBCs valli bull CBSCs work TIlen pick a few CBBCs sense of the word but a contract that U~ of the CBSC and at that time the mula to calculate the CBBCsprice The closer the strike price is to the that suit vou and read aD the details you can buy and sell It value is de shy residual value is calculated by refershy But ofcourse th~ works fine if the undedyingruiCt value the higherUl Onceyou have done aU that ifyou lermined among other thinr by the ence to the strike price HSJ doe iner 3 e Ul value Ii and the larger the potential reshy understand it and you like the Ii I performanceofan asset it is linked pound0 The entitlement ratio represent In the same way that percentage wards Butofcourse ifthestrike price rewud balance go for it But if anyshyAnd the ass I thalll10st CBBCs tradshy the CBOCs exposure to the wlderlyshy increase jn thevalue oftlle CBBC are is close to the undedying asset price thing se ms conru~illg it iii a good ed in Hong Kong are linked [0 is the lng asset Uthis ratio 10 ou would greater than percemage mcreases m then the chance thai be underlying sign this (s not the product foryou Jiang Seng Index need to buy10 CBSCs to have one-to the value of the HI 0 are losses asset price hits (he call price and the

The bull bear part describes two one exposure t the underlying asset Imagine the index does not rise and contract is terminated i abo higher writ toUS different product that can also be I the tmderlying asset is a share thai you do not get the chance to nO for a This amplification of risk and re 00 you thInk cBees are a called a callable bull contract and a i worth HK$200 and the trike price profit Tfthings go badly and the lSI ward is known as gearingn The good product Send 10Ul

c-illable bear contract A HSI callable ofa bull CBSG isHK$lOO the value of drops lhe contract will be called and CBBO that nse or fall in value faster comments and Queries to bull contract rises m vWue ifthe iod x the CBBC is asi ally the diiferpoundnce you will receive the residual value - relative to their undedying as ct are yourmoneyScmpcom rises and a H ) callable bear contrnCt or HK$IOO If the entitlement mtio i generally the difference between the rises in value ifit falls call price and the trike price __

The callabl part is one of the Say the TlSI drops 4000 points or ~ key thiugs that ~ets a CBBC aparl ABBe not ill e an 27 per cent U Ing the same fum1Ula frOID imilar derivative products your CBBC has dropped 80 per centa C lulator it willsuch as warrants If the value of the from HK$051 to 111($010 underlyingassel hits a predeter shy Now ifyou think the HST is goingnot be worth 1csmined strike price the bank that to drop you buy a bear CBBC If the LltsUed it gets to call the CBBe Ibat than zero so Oll will indeJt i at 15000 the value of a bear means the holder of the CBBC has to CBSC I its strilce price les 15000 give it back to the i uer and (he coushy n verI e1110r than plus finan costs So the lower the tract is over the CBBC i gone index goes the greater the value of

)fyou think the HSI will rise you yo 1have inve ted the contract Just like with II bull might buy a callable bull contra t If CBBC if Ihe inde move in lb the HSI ri e5 you hould bc able 10 wrong direction which in the case of sellit at aprofil But ifthe HSI falls the L the CBBC would be worth IIK$lOO a bear CBRC would be upwards the CBBG value will also drop givlOg If the entitlement ratio i 100 Ihe bear CBBC loses value U the indeshyyou the option to sell it and take the CBBC iswonh HK$1 ifit is 1000 then moves upwardgt for long enough the loss or perhaps hold on in the hope HK$O 10 and 0 on contract will be called and you may that the IISl will recover Assume you buy a callable bull be left with some residual value

811 t if the CBBC ha~ a call price of contract with the H I as the underlymiddot One slighllwist if the cal ulauon say liOOO and the HSl falls to nooo ing asset Say the lIS is at 15000 ar of residual valu Is that although the you no longer h ve the option of the tim ofbuyingit thestrike price is contract will be called if the inde holding onto the contract Instead 10000 the call plice i 11000 the reaches tl e call price th residual the issuerwill callil back and you will finance costperCBBC is HKSOOl and value is nOi calculated immediately have lost your in~unent the entitlement mtio u10000 In the case of a bull contract the

CBaCs also have a number of As this is a bull contract you underlying aliSet price used to calcushyother importan t features that need to would buy It if you antiCipate the HSI late the residual value is the lowest be understood if you want to huy Is going to rise If (he IIST is at 15000 alue of the aiset in the tradingsesshythem Th se are spot price strike when you buy the CBBC its value sian during which the SBC is called price finance COSt expiry date enshy would be 15000 less the trike price and in the following sian titlement ratio and underl~~H asMt diVided by the entitlem nl ratio plus So in our bull CBBe if it is called

Spot pTi e is what it ac ycosts the finance cost when the II I is al 11000 but later to buy or sell the CBnC I I e strike That works ul to be HK$O51 - that day It hits 9900 the reSIdual price is a bit more confu ing It is that is what this CBSC is worth when value wil be zero 11 is nQt like an linked to the coocept of residual you buy it That does nOI of cours accumulator - a CBBG will not be value The residual value is what the mean you can go buy one for worthless than zero so you will never CBBC is wurth niter Jl js called So in HK$05L lhere will be a minimum lose more than you have invested our example if the call price i 11000 number ou need to buy caned a But the residual value can evaporate and the HSI fulls to llOOO the CBBC board tot of 10000 ~y But till the if the markel contmues to move in will be called Bur if the strike price entry price if you jusI buy one board the wrong direction 10000 the CBBG may have some reshy lot on this imaginary CBSC a rela- Searin mind 1am using a theoretshysidual value This is because th reshy tivelysmallHKSSlOO ical CBBC 10 Illustrate how these sidual value IS calculated on Ihe basis Gen rcillY in~~~will~o~ru~y~h~o~ld ~~yen~O~ T~h~e~a~c~t~u~a~l~w~o~rl~d~o~t~~_~~l~m~g~s rk~~ ~~~~~~~~~~~~~~L-~~~~~~~~1II