DEFINITION of 'Gamma Pricing Model'
An equation for determining the fair market value of a Europeanstyle option when the price movement on the underlying asset does not resemble a normal distribution. The gamma pricing model is intended to price options where the underlying asset has a distribution that is either longtailed or skewed, where dramatic market moves occur with greater frequency than would be predicted by a normal distribution of returns.
BREAKING DOWN 'Gamma Pricing Model'
While the BlackScholes option pricing model is the best known, it does not provide accurate pricing results under all situations. In particular, the BlackScholes model assumes that the underlying instrument has returns that are normally distributed. As a result, the BlackScholes will misprice options on instruments that do not trade based on a normal distribution. Many alternative options pricing methods have been developed with the goal of providing more accurate pricing for realworld applications such as the Gamma Pricing Model. Generally speaking, the Gamma Pricing Model measures the gamma, which is how much fast the delta changes with respect to small changes in the underlying asset's price.

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