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Pool Value Replication (CPM) and Impermanent Loss Hedging

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Listed:
  • Agustin Mu~noz Gonzalez
  • Juan Ignacio Sequeira
  • Ariel Dembling

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.

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  • Agustin Mu~noz Gonzalez & Juan Ignacio Sequeira & Ariel Dembling, 2025. "Pool Value Replication (CPM) and Impermanent Loss Hedging," Papers 2503.21967, arXiv.org.
    • Handle: RePEc:arx:papers:2503.21967
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    File URL: http://arxiv.org/pdf/2503.21967
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