The rate of change in the delta of an option for a small change in the
underlying. The rate of change is greatest when an option is at-the-money and
decreases as the price of the underlying moves further away from the strike
price in either direction. A long gamma position is one in which a trader is
long options. For a position that is short gamma, the opposite holds. Gamma can
be hedged by mirroring theoptions position. Alternatively, a trader may choose
to adjust the position in the underlying continually in order to maintain delta
neutrality.
Garman-Kohlhagen Model
A model developed to price European-style options on spot foreign exchange
rates. The model is based upon the Black-Scholes model with the addition of an
extra interest rate factor for the foreign currency.
Geared barrier option
A type of in-the-money barrier option where the barrier is in-the-money and
lies between the strike and the underlying spot rate.
Gearing
Gearing refers to the degree of exposure of a product to movements in the
underlying index. A product with 100% gearing would have returns exactly equal
to any rise in the index. A product's gearing is also called participation.
Geometric Brownian motion
Geometric Brownian motion is a model frequently used for the diffusion
process followed by asset prices. Standard Brownian motion is a random walk
process with Gaussian increments; that is, changes in the asset price are
normally distributed. The term geometric means it is the proportional change in
the asset price (as opposed to the absolute level) that is normally distributed.
This gives the model useful properties, in that the asset price cannot be
negative, and that the logarithm of the asset price will be normally
distributed, making the model analytically tractable.
Global floor
A term usually associated with cliquet products. A cliquet product with
global floor will provide a minimum return that is at least equal to the
principal invested. Some cliquet products can have guaranteed principal
redemption of more than 100%.
Growth product
A term used to describe a type of structured product whose payouts are only
made at maturity with no income stream during the product life. A growth product
can be either principal guaranteed or non-guaranteed, although the former is
common.
Guarantee level
The amount of principal that is guaranteed to be repaid at the maturity of
the product.
Guaranteed coupon
Coupon payments that are guaranteed by the guarantor, and are paid during the
life of the product irrespective of performance of the underlying.
Guaranteed fund
A guaranteed fund comes with a promise by the guarantor to repay a portion,
usually 100% of the principal at maturity. Guaranteed funds can also incorporate
guaranteed coupons payable regardless of the underlying performance and/or
non-guaranteed coupons linked to the performance of underlying assets, often a
stock index or basket of stocks. "Guaranteed" does not mean the investment is
risk-free. The guarantee on principal repayment usually holds only when the
product is held to maturity, and is subject to credit risk of the guarantor.
Investors who redeem early are usually repaid at net asset value and thus
subject to market risk. A guaranteed fund is constructed by investing part of
the proceeds in a zero-coupon bond or other fixed income instrument - which
underwrites the guaranteed payment at maturity - and the rest of the money in an
embedded call or put option on the underlying for additional returns. Hence,
investors also run counterparty risk in relation to the option strategy. A
guaranteed structure can also take the form of a guaranteed note or guaranteed
bond. Generally, any structured product with a promise to return 100% of the
principal invested at maturity can be considered a guaranteed product.
Guaranteed return on investment
Any instrument (usually a structured note) which guarantees investors a
minimum return on their investment. This can be achieved by combining a debt
issue with a structure, such as a collar or cylinder, which locks gains into a
range. This means that the investor gains protection from an adverse market move
by limiting participation in any favourable move.
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