Target Weight Mechanism doesn't make delta hedge easier

TL;DR

This paper critically examines the Target Weight Mechanism in PDLPs, proving that its purported ability to lower delta is either self-contradictory or impossible to achieve uniformly.

Contribution

It provides a formal proof that the conditions claimed to enable delta reduction via TWM are invalid and that no TWM can universally lower delta.

Findings

The condition for TWM to lower delta is self-contradictory.

No TWM can lower delta uniformly across all scenarios.

The paper refutes prior claims about TWM's effectiveness.

Abstract

Chitra et al. (2025) claim that Target Weight Mechanism (TWM) in Perpetual Demand Lending Pools (PDLPs) can lower the delta of the portfolio under certain condition. We prove that their condition is self-contradictory. Furthermore, we prove an impossibility result that no TWM can lower the delta uniformly.