👉 Exchange math is a fundamental concept in financial mathematics used to calculate the present value of future cash flows, particularly in options pricing and other derivative markets. It involves determining the current worth of expected future payments or cash flows, discounted at a specific interest rate. The basic formula is PV = Σ [CFt / (1 + r)^t], where PV is the present value, CFt is the cash flow at time t, r is the discount rate (often the risk-free rate), and t is the time period. This formula accounts for the time value of money, recognizing that a dollar today is worth more than a dollar tomorrow due to its potential earning capacity. By summing these discounted cash flows, exchange math helps investors and traders make informed decisions about buying or selling financial instruments like options.
