Hedging

Keith A. Lewis

Jun 6, 2026

A derivative is a contract: “I will give you this on these dates if you will give me that on those dates.”

A cash settled derivative is defined by a finite number of increasing stopping times \hat{\tau_j} and amounts \hat{A}_j. A buyer pays some amount up front to the seller who is contractually obligated to make the specified payments at the specified dates.