The Replicating Portfolio of a Constant Product Market

10 Pages Posted: 1 Apr 2020

Date Written: March 8, 2020

Abstract

We derive the replicating portfolio of a constant product market. This is structurally short volatility (selling options) which explains why positive transaction costs are needed to induce liquidity providers to participate. Where futures and options markets do not exist, this payoff can be used to create them.

Keywords: Constant product markets

Suggested Citation

Clark, Joseph, The Replicating Portfolio of a Constant Product Market (March 8, 2020). Available at SSRN: https://ssrn.com/abstract=3550601 or http://dx.doi.org/10.2139/ssrn.3550601

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