Letter of Guarantee

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Letter of Guarantee

A letter from a bank to a brokerage firm which states that a customer (who has written a call option) does indeed own the underlying stock and the bank will guarantee delivery if the call is assigned. Thus the call can be considered covered. Not all brokerage firms accept letters of guarantee. Also: letter issued to Option Clearing Corporation by member firms covering a guarantee of any trades made by one of its customers, (a trader or broker on the exchange floor).

Letter of Guarantee

In call options, a guarantee of delivery of securities made by a bank to a brokerage on behalf of the bank's client. When an investor is writing a call option and does not have the underlying asset in his/her brokerage account, the brokerage may require a letter of guarantee in order to eliminate the risk that the investor will not deliver the securities should the call be exercised.

letter of guarantee

A letter from a bank stating that a customer owns a particular security and that the bank will guarantee delivery of the security. A letter of guarantee is used by an investor who is writing call options when the underlying stock is not in his or her brokerage account.
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The letters of guarantee issued by banks and other business entities in the UAE amounted to Dh12.7 billion during the first nine months of 2018, a growth of 15 per cent as compared to the end of 2017, a media report said.
To avoid the paperwork for letters of guarantee, many people exploit the situation by making counterfeit papers.