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GAMUDA-JA Finance Charge higher than Credit Card Rate

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Callable Bull and Bear Contract (CBBC) made its debut on Bursa Malaysia 16th July 2010 with CIMB issuing four Callable Bull Contract (CBLC) on Air Asia, Berjaya Corporation, Gamuda and Genting. 

 

As with many new products in the past, these CBLCs were heavily traded on the first day of trading.  With very limited introduction of the products to the investing public and lack of up-to-date data and calculators in the issuer’s website, it is rather strange to see these CBLCs being so heavily traded.  Either investors do not understand the products (and treat it like normal warrants) or the market maker is not doing a good job in ensuring CBLCs prices tracking the underlying shares’ performance.

 

Unlike call warrants, CBLCs are always in-the-money by design. It also has another feature known as a mandatory call event.  Essentially, buying CBLCs is like buying shares on margin with an automatic cut loss process once the mother share hit the call price.  To understand CBBC more, please read my previous article on CBBC written in 2008.

 

The price of a CBLC comprises of an intrinsic value and finance charge (as opposed to time value for warrants).  Let’s use GAMUDA-JA, the most heavily traded CBLC on 16th July to illustrate some concepts of this instrument.

 

At the close of 16th July trading, the price of GAMUDA and GAMUDA-JA were RM3.36 and RM0.24 respectively.  GAMUDA-JA has an exercise price of RM2.55 and exercise ratio of 5.  Based on the closing price of GAMUDA-JA of RM0.24, the intrinsic value and finance charge are RM0.162 and RM0.078 respectively (refer to table below).  According to CIMB term sheet on GAMUDA-JA, the initial funding cost (represented in %) was 6.32% per annum.  CIMB had used this funding rate to determine the issue price of RM0.15 for GAMUDA-JA based on the mother share price of RM3.18 on price fixing date.

 

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