GLOSSARY

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 the options position. Alternatively, a trader may choose to adjust the position in the underlying continually in order to maintain delta neutrality.

A guaranteed fund comes with apromise by the guarantor to repay aportion, usually 100% of the principal atmaturity. 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 riskfree.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.

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.