The Replicating Portfolio of a Constant Product Market
10 Pages Posted: 1 Apr 2020
Date Written: March 8, 2020
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
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