This paper provides an introduction to derivative products and markets. It also reviews the basic conceptual framework for asset pricing. Derivative products and markets are defined and insight into asset pricing is provided. This is based on assumptions of no-arbitrage and frictionless markets....

Hedging down-and-out puts (and up-and-out calls), where the maximum payoff is reached just before a barrier is hit that would render the claim worthless afterwards, is challenging. All hedging methods potentially lead to large errors when the underlying is already close to the barrier and the...