**Short Answer**
TOTEM is indeed a market data service (now under S&P Global’s family, formerly IHS Markit) that aggregates consensus pricing for derivatives across various asset classes. It provides different parameters—often called “TOTEM values”—for instruments such as forwards, options, swaps, and so forth. Among these parameters, TOTEM also includes values for forward premiums, bases, or spreads in many markets. For commodities or other instruments traded in a basis or forward structure, those TOTEM-derived metrics can help traders in COB (cost-of-carry) or COB/c trading strategies by giving them robust market consensus on forward curves and spreads.
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## What is TOTEM?
TOTEM (originally from “Markit TOTEM”) is a pricing service that collects, aggregates, and refines contributed data from numerous financial institutions. The result is a consensus-based data set of valuations (e.g., implied volatility surfaces, forward curves, option premiums, etc.) used by banks, hedge funds, and other market participants to:
1. Verify their own internal pricing models.
2. Improve the accuracy of their daily/monthly mark-to-market valuations.
3. Benchmark trading desk pricing to an independent, industry-wide standard.
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## TOTEM Parameters and Forward Premium/Basis
Because TOTEM collects detailed market data, it typically offers multiple parameters—like *forward levels*, *volatilities*, *spreads*, *premiums*, and *bases*—depending on the asset class. In a forward-based market (especially commodities, interest rates, or FX derivatives), TOTEM data points can include:
- **Forward Curves**: Consensus forward prices for certain tenors (e.g., 1M, 3M, 6M, 1Y).
- **Premiums & Bases**: These might refer to the difference between a spot price and a local benchmark, or a “premium” required for holding a certain forward position.
- **Volatility Surfaces**: Implied volatilities across strikes and maturities, often used for pricing options or exotic derivatives.
TOTEM’s advantage is that the data is contributed by a large group of market participants. This *consensus approach* can smooth out idiosyncratic or outlier pricing, potentially providing a more realistic measure than relying on a single broker quote.
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## How TOTEM Data Can Benefit COB/C Trading
“COB/c” might refer to *cost-of-carry* or otherwise a strategy that involves trading the difference between spot and forward prices (or using derivatives to capture the basis between two instruments). TOTEM’s consensus forward curves and basis levels are particularly helpful in:
1. **Identifying Mispricings**: If the consensus TOTEM forward curve indicates a different forward level than one’s internal model, a COB/c-driven trader might spot potential arbitrage or relative-value opportunities.
2. **Consistent Benchmarking**: Using TOTEM quotes lets a trading desk benchmark their carry or basis assumptions against a widely accepted standard, strengthening risk management and potential P&L checks.
3. **Transparent Mark-to-Market**: Regulators and senior management often require verifiable valuations. TOTEM data is recognized in the industry and can bolster confidence in the desk’s forward/basis marks.
Overall, TOTEM supports a more accurate and transparent pricing framework, which is crucial for any trading strategy that relies on forward premiums, bases, or the cost of carry.
Below is an overview of how TOTEM’s forward/basis data can impact a market maker in callable bull/bear contracts (CBBCs). While TOTEM is not exclusively designed for CBBCs, its consensus forward and volatility data are often helpful for structuring and managing many equity- and index-linked products—CBBCs among them.
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## Quick Refresher: CBBCs
Callable bull/bear contracts (CBBCs) are structured products, commonly listed in Hong Kong, that provide leveraged exposure to an underlying (e.g., a stock or index). They have a built-in knock-out feature:
1. **Bull**: Knocked out if the underlying price falls below a knockout barrier.
2. **Bear**: Knocked out if the underlying price rises above a knockout barrier.
As a market maker, you constantly manage the delta and gamma risk of the product, because you must hedge customer flow and your own inventory. Critical inputs for pricing and risk management include:
- Forward prices (spot, futures, etc.)
- Implied volatility and skew
- Dividends and repo parameters (“cost-of-carry” for equity underlying)
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## How TOTEM Data Helps CBBC Market Makers
### 1. Forward Curves & Cost of Carry
A significant piece of pricing any equity- or index-linked derivative is modeling the cost of carry (e.g., dividend yield, repo rates, etc.) and forward levels. TOTEM aggregates consensus forward curves from multiple contributors, so you can:
- Cross-check your internal forward curve against a market consensus.
- Detect if your carry assumptions (dividends, lending rates, etc.) deviate substantially from the industry norm—possibly revealing arbitrage opportunities or model misalignment.
Because CBBC payouts hinge on the underlying’s price trajectory (especially near barriers), an accurate forward helps you gauge your potential knock-out risk and inform your hedge ratio.
### 2. Volatility & Option Market Parameters
Even though CBBCs are “linear” instruments at face value (because once they pass the knock-out, the contract is essentially worthless or fully converted), market makers often hedge with options or correlated instruments. TOTEM’s equity/FX/commodity vol surfaces:
- Provide implied volatility “consensus” across tenors and strikes.
- Support accurate pricing of the knock-out event by informing your internal volatility models.
- Let you reconcile your implied volatility levels with industry benchmarks.
When you see TOTEM reflect a shift in implied vol or skew, that can significantly impact how you price new issuance or manage existing inventory of CBBCs.
### 3. Basis & Timing of Knockout Events
Some TOTEM data sets include basis for near-dated vs. far-dated maturities. Because CBBC knockouts can be triggered at any point within the product’s life, these *intra-day* or *short-tenor basis levels* might matter. If TOTEM data signals an unusual basis shift, you can:
- Adjust the cost of rolling your hedge if the product extends beyond certain maturities.
- Manage the potential risk premium for times when the underlying might breach the barrier (e.g., dividend ex-dates, index rebalancing, earnings announcements, etc.).
### 4. Independent Mark-to-Market (MTM)
Regulators and internal risk committees usually require robust valuation sources, especially for structured or exotic products. TOTEM has established credibility in the industry for its independence and broad contributor universe. Using TOTEM:
- Strengthens your mark-to-market process and helps you stand behind your daily P&L.
- Makes sure your desk’s valuations align with “fair market levels” when there’s less immediate liquidity in the CBBC itself.
### 5. Benchmarking & Workflow Efficiency
Many CBBC issuers have diverse lines of structured products—warrants, options, knock-outs, delta-one swaps, etc. TOTEM is widely used across all sorts of derivatives. Having a single consensus data source:
- Simplifies your calibrations for multiple products.
- Reduces internal friction between product lines (everyone uses the same TOTEM “input deck”).
- Streamlines compliance and reporting (especially when validating unusual high-gamma scenarios around barrier knockouts).
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## Bottom Line
Yes, TOTEM’s “different parameters” (forward curves, implied vols, and basis/premiums) can be very useful to a CBBC market maker. Leveraging these consensus metrics:
- Enhances the accuracy of your knockout probability assessment.
- Reinforces consistency for internal marking and hedging decisions.
- Provides an industry-approved benchmark to help confirm or challenge your desk’s own pricing models.
Combined, these practical benefits improve risk management and operational efficiency, which can ultimately help a CBBC trading desk stay competitive in a crowded marketplace.
Below is a more “beginner-friendly” explanation of why modeling the cost of carry (like dividend yield, repo rates, etc.) and forward levels is crucial in pricing equity or index derivatives—especially Callable Bull/Bear Contracts (CBBCs).
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## 1. The Basics: Underlying Assets and Derivatives
- **Underlying Asset**: This could be a single stock (e.g., Apple shares) or an index (e.g., the Hang Seng Index).
- **Derivative**: A financial instrument whose value depends on (or “derives from”) the price of the underlying asset. Examples: options, futures, warrants, and structured products like CBBCs.
When pricing any derivative, you need to forecast how its underlying asset’s price might move because the contract’s payoff depends on that price. One of the key building blocks for that forecast is the “forward price.”
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## 2. What Is the Forward Price?
Imagine you want to lock in today the price at which you will buy (or sell) the underlying in the future—say, three months from now. The price you agree upon is called the **forward price**. It’s essentially “today’s best guess” of the future price, adjusted for certain carrying costs or benefits.
### Cost of Carry:
- If you **hold** a stock, you might get **dividend payments**, but you might also pay **interest** on any borrowed money (repo rate or financing rate).
- If you **hold** an index basket, you still consider the **dividends** paid by the stocks inside the index, and the interest or financing cost needed.
Think of it like this:
• Forward Price ≈ Spot Price + (Financing Costs) − (Dividends or Other Income)
If dividends are high, that reduces the forward price (because anyone holding the stock directly gets paid dividends). If interest rates are high, that usually increases the forward price (because someone holding the stock has to pay more in financing). This net effect is called the **cost of carry**.
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## 3. Why Forward Levels Matter (Especially for Derivatives)
When traders (or financial models) price derivatives, they often base calculations on the **forward price** of the underlying because:
1. **Replicating the Payoff**: You can “replicate” many derivatives by trading in the underlying market. If you know how much it costs to hold (or short) the underlying until the derivative expires, you can figure out a fair price for the derivative.
2. **Hedging**: Market makers who sell derivatives often hedge themselves by buying or selling the underlying. The forward price tells them what the market expects the underlying to be worth at certain future dates, helping them manage that hedge properly.
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## 4. How This Relates to CBBCs
### 4.1 CBBC Overview
A **Callable Bull/Bear Contract (CBBC)** is a product that provides leveraged exposure to an underlying (a stock or an index). It also has a **knock-out** feature:
- **Bull Contract**: If the underlying’s price ever falls below a certain barrier, the contract “knocks out” and typically becomes worthless.
- **Bear Contract**: If the underlying’s price ever rises above a certain barrier, it knocks out similarly.
Because of this knock-out feature, the payout from a CBBC heavily depends on whether the underlying price **crosses** (or gets close to) that barrier.
### 4.2 Why the Underlying Price Trajectory Matters
- The CBBC payoff at expiry (if it hasn’t knocked out earlier) is based on where the underlying’s price ends up.
- If the price hits the knock-out barrier beforehand, the investor loses most or all of the contract’s value.
- Hence, the path of the underlying’s price—especially near the barrier—is extremely important.
This is where the **forward price** and **volatility** come into play. The forward price is the market’s consensus of where the underlying might be in the future; volatility measures how much that price could move around. Together, they help the CBBC issuer figure out how likely it is that the barrier gets hit.
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## 5. The Role of an Accurate Forward Price in Managing Knock-Out Risk
As a market maker:
1. **You Issue the CBBC**: You are selling these contracts to investors.
2. **You Hedge Your Exposure**: Every time someone buys a CBBC from you, you want to hedge the risk that the underlying moves against you.
### Using the Forward Price
- **Knock-Out Risk Assessment**: If the forward suggests the underlying might stay far from the barrier, your expected knock-out probability is lower. Conversely, if the forward is near that barrier, the risk of knockout is higher.
- **Hedge Ratio**: The hedge ratio is how many shares (or futures, or other instruments) you need to buy or sell to offset your exposure.
- If you expect the underlying to be close to the barrier, you might hold a different hedge ratio than if you think it will stay comfortably away from that barrier.
- You also adjust this hedge ratio as the market moves, ensuring you stay “neutral” overall (so that you minimize unexpected losses or gains).
An accurate forward level helps you decide the “fair value” of the product you’re issuing and manage the ongoing risk of a potential knock-out event.
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## Putting It All Together
1. **Cost of Carry → Forward Price**:
• Dividends, interest rates, and other costs/benefits define how the price “carries” from today into the future.
• This calculation yields a **forward price** for each future date (e.g., 1 month, 3 months, 6 months out).
2. **Forward Price + Volatility → Derivative Pricing**:
• A major part of valuing derivatives (including CBBCs) comes from how the underlying is expected to trade.
• The forward price is the “center,” and volatility describes the “range” of movement around that center.
3. **Knock-Out Feature → CBBC Payout**:
• For a CBBC, if the underlying crosses a knockout barrier, the product terminates.
• Thus, you need forward price assumptions to figure out the likelihood of hitting that barrier.
• This probability shapes the pricing, because investors need to be compensated for the risk of losing their entire investment if the barrier is reached.
4. **Market Makers Hedge with the Underlying**:
• They continuously adjust how much underlying they hold (the hedge ratio) to offset the risk of the CBBC they’ve issued.
• The forward price guides them on where to execute these hedges for future dates.
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## Final Takeaway
- **“Cost of carry”** is simply the net effect of all costs (e.g., financing) and benefits (e.g., dividends) of holding an asset over time.
- That **cost of carry** directly influences the **forward price**, which is the market’s best estimate of future prices.
- When pricing and managing a derivative like a CBBC—whose payout depends heavily on whether the underlying crosses a certain barrier—the forward price is a critical input. It helps the market maker determine how likely a knock-out might be and how to hedge properly.
In short, getting the cost of carry right and having accurate forward levels are foundational to fair and stable pricing of derivatives, including CBBCs.