CBBC Costs Explained:
How Funding Cost, Premium and Bid-Ask Spread Eat Your Returns

Three hidden costs:
funding cost, premium, bid-ask spread

When buying shares, the costs are commission and stamp duty, settled in one round of buying and selling. The cost structure of CBBCs is fundamentally different — as instruments through which issuers provide leverage, their costs come in two layers: fees paid once at entry, and fees that accrue daily while the position is held. The three costs can be summarised as follows:

Taken together, the impact may look limited over the short term, but the longer the holding period — or the less suitable the product — the more easily profits turn into losses. Each cost is examined in turn below.

Funding cost:
borrowing leverage from the issuer comes with interest

The price of a CBBC is not simply equal to its intrinsic value. The actual buy price equals intrinsic value plus funding cost (the same applies to bears). The funding cost is the portion of the product price that reflects the issuer's financing cost and risk premium — equivalent to the "interest" an investor pays the issuer for borrowing leverage.

Using the example from the leverage guide: with HSI at 20,000, a bull certificate with exercise price 19,000 and entitlement ratio 10,000:1 has an intrinsic value of (20,000 − 19,000) ÷ 10,000 = HK$0.10. Once the issuer factors in the funding cost, the quote will sit above 0.10 — assuming an annual funding rate of about 5% and six months to expiry, the funding cost is roughly 19,000 × 5% × 182 ÷ 365 ÷ 10,000 ≈ HK$0.005, putting the buy price at around HK$0.105.

The key point is that the funding cost accrues daily. Today it is 0.005; after holding for ten more days it will edge higher — part of the daily price is "rent", not the movement of the underlying. This is why holding CBBCs for the long term is particularly unfavourable: even in a sideways market, the value of the certificate is steadily eroded by the funding cost. It also explains why "undying bulls" are not truly cost-free — they have no expiry date, but a daily cost still applies.

In practice, investors do not need to calculate to several decimal places themselves: quote systems and issuer websites usually show a "funding cost" or "financing cost" field, revealing the rate each issuer applies. Funding rates can differ noticeably between issuers and products — this is a key point of comparison when selecting a certificate.

Premium:
buying distance and time comes at a price

In simple terms, the premium is the amount by which a CBBC's buy price exceeds its intrinsic value. Why would the buy price exceed intrinsic value? Because what the investor is buying is not limited to "today's intrinsic value", but also includes:

• Distance— the further the call price sits from the current price, the larger the buffer, and this "insurance" has a price;
• Time— with the product not yet expired, the investor is buying "potential future upside", and this option value has a price;
• Funding cost — the financing cost mentioned above is usually quoted together with the premium.

In general, near-to-money products carry a lower premium, while far-from-money products carry a higher one. Near-to-money CBBCs sit close to the call price, offer limited "insurance", and therefore have a smaller premium; far-from-money products offer a larger buffer and a visibly higher premium. So "far = safe" is not a free lunch — it is bought with premium.

Premium serves another important purpose: comparing similar products. Between two bulls with similar call and exercise prices, the one with the lower premium is usually the better value. Issuer websites list a "premium" field, so certificates can be compared side by side.

Bid-ask spread:
how issuers quote determines your entry and exit cost

In the CBBC market, issuers act as market makers: they quote both a "bid price" (the price at which you sell to them) and an "ask price" (the price at which you buy from them). The difference between the two is the bid-ask spread. The spread is a direct cost — between one buy and one sell, the investor has already lost the spread amount.

For example, a bull certificate quotes 0.104 / 0.106 (bid 0.104, ask 0.106). An investor buying at 0.106 and immediately selling back to the issuer would receive only 0.104 — a round-trip loss of 0.002, about 1.9% of the buy price. In other words, the market must first move 2% just to break even, before the funding cost is even considered.

The width of the spread usually reflects liquidity and risk: popular HSI CBBCs have narrower spreads, while less liquid single-stock CBBCs have wider ones; spreads are narrow in normal conditions but can suddenly double around major news or near the close — one of the signals that "abnormal issuer pricing = stay out" (see the practical trading guide).

All three costs combined:
how much do you actually lose holding for ten days?

Using the example above to run the full account: HSI at 20,000, bull intrinsic value 0.10, funding rate 5% per annum, six months to expiry, buy price around 0.105.

The table reveals the key insight: for short-term trading, the cost comes mainly from the bid-ask spread; for long-term holding, it comes mainly from the funding cost. If you plan to hold for months, the funding cost can eat close to 5% — the market would need to rise 5% just to break even. CBBCs are therefore inherently short-term instruments, and the cost of holding long term is simply not worthwhile.

Note: the figures above are simplified estimates. Actual funding rates, spreads and premiums vary by issuer and product; always refer to the issuer's official announcements. Check the product terms and latest quotes before placing an order.

A three-step pre-trade cost check:
do not compare leverage alone

When selecting CBBCs, besides comparing leverage and call distance (see the leverage vs buffer guide), run a three-step cost check:

It also helps to check the street volume tool before entering — see where the heavy zones sit, so you can avoid call-triggering clusters and not have your certificate called away before you have even recovered the costs.

Summary

The cost of CBBCs runs three layers deeper than it appears: the funding cost accrues daily, the premium is paid once on entry, and the bid-ask spread is borne on both sides of a round trip. For short-term trades, the cost is mostly the spread; for long-term holding, the funding cost eats a substantial part of the return. When selecting certificates, do not compare leverage alone — factor in the costs to understand how far the market actually needs to move for you to break even. Three reminders: