2025/03/27 by A Gonzalez, Gonzalez, Agustin Muñoz, Sequeira, Juan Ignacio +2
Economics, Econometrics and Finance · #Stochastic processes and financial applications #Financial Markets and Investment Strategies #Credit Risk and Financial Regulations
paper · pdf · doi:10.48550/arxiv.2503.21967
This work analytically characterizes impermanent loss for automated market makers (AMMs) in decentralized markets such as Uniswap or Balancer (CPMM). We derive a static replication formula for the pool's value using a combination of European calls and puts. Furthermore, we establish a result guaranteeing hedging coverage for all final prices within a predefined interval. These theoretical results motivate a numerical example where we illustrate the strangle strategy using real cryptocurrency options data from Deribit, one of the most liquid markets available.