Pool Value Replication (CPM) and Impermanent Loss Hedging
Risk Management
2025-03-31 v1 Mathematical Finance
Abstract
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.
Keywords
Cite
@article{arxiv.2503.21967,
title = {Pool Value Replication (CPM) and Impermanent Loss Hedging},
author = {Agustin Muñoz Gonzalez and Juan Ignacio Sequeira and Ariel Dembling},
journal= {arXiv preprint arXiv:2503.21967},
year = {2025}
}
Comments
21 pages, 4 figures