Leveraged Exchange-Traded Funds: Price Dynamics and Options Valuation
The ETF industry has experienced tremendous growth over the past decade. Within the ETF universe, some funds are designed to replicate a constant multiple (called leverage ratio) of the daily returns of a reference index. These relatively new financial products are called leveraged ETFs (LETFs).
This book aims to provide an overview of the major characteristics of leveraged ETFs, examine their price dynamics, and analyze the practical problems that arise from trading LETFs and pricing options written on these funds.
The full book is available for free download (see link below).
When writing this book, we aim to make it useful not only for graduate and advanced undergraduate students but also for researchers interested in financial engineering, as well as practitioners who specialize in trading leveraged or non-leveraged ETFs and related derivatives.
Table of Contents (pdf)
- Introduction
- Price Dynamics of Leveraged ETFs
- Risk Analysis of Leveraged ETFs
- Options on Leveraged ETFs
- Conclusions
In the first part of the book, we assume very little background in probability and statistics in our discussion of the price dynamics of LETFs. Nevertheless, new insights and trading strategies are discussed with mathematical justification and illustrated with a host of examples using empirical data.
Our emphasis is on the risk analyses of LETFs and associated trading strategies. New risk management concepts, such as admissible leverage ratios and admissible risk horizons, are introduced. We also derive and analyze several trading strategies, including static portfolios, pairs trading, and stop-loss strategies involving ETFs and LETFs.
In the final part, we present the analytical and empirical studies on the pricing and returns of options written on LETFs. Our objective is to examine a consistent pricing approach applied to all LETFs with different leverage ratios with stochastic volatility and jumps in the reference index. This allows us to identify any price discrepancies across the LETF options markets.
The results are useful not only for market makers and traders, but also for asset managers and regulators.
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The full book is available for free download:
https://tinyurl.com/LETFbookfree
Review
“The book provides an overview of the major characteristics of leveraged exchange-traded funds (LETF), examines their price dynamics, and analyzes the mathematical problems that arise from trading LETFs and pricing LETF options. … Using the formulas provided, investors can quantify the risk and tailor suitable trading strategies. … The book is useful reading for both academics and professionals in finance.” (Pavel Stoynov, zbMATH 1338.91007, 2016)
