This book provides an analysis, under both discrete-time and
continuous-time frameworks, on the price dynamics of leveraged
exchange-traded funds (LETFs), with emphasis on the roles of
leverage ratio, realized volatility, investment horizon, and
tracking errors. This study provides new insights on the risks
associated with LETFs. It also leads to the discussion of new risk
management concepts, such as admissible leverage ratios and
admissible risk horizon, as well as the mathematical and empirical
analyses of several trading strategies, including static
portfolios, pairs trading, and stop-loss strategies involving ETFs
and LETFs. The final part of the book addresses the pricing of
options written on LETFs. Since different LETFs are designed to
track the same reference index, these funds and their associated
options share very similar sources of randomness. The authors
provide a no-arbitrage pricing approach that consistently value
options on LETFs with different leverage ratios with stochastic
volatility and jumps in the reference index. Their results are
useful for market making of these options, and for identifying
price discrepancies across the LETF options markets. As the market
of leveraged exchange-traded products become a sizeable connected
part of the financial market, it is crucial to better understand
its feedback effect and broader market impact. This is important
not only for individual and institutional investors, but also for
regulators.
General
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