Corporate Action Adjustment

Corporate Action Adjustment refers to the mathematical process of modifying the terms of a derivative contract, such as strike price and contract size, to compensate for events like stock splits, mergers, or spin-offs. These adjustments are designed to neutralize the impact of the event on the derivative's value, ensuring that the option remains a neutral instrument.

In decentralized finance, these actions may be triggered by decentralized autonomous organization governance votes that alter token supply or utility. The adjustment ensures that the derivative holder does not experience a change in their net delta or gamma exposure due to the external event.

This is essential for market integrity, as it prevents participants from profiting solely from the administrative actions of the underlying entity.