Short-time expansions for call options on leveraged ETFs under exponential Lévy models with local volatility
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Publication:4635252
Abstract: In this article, we consider the small-time asymptotics of options on a emph{Leveraged Exchange-Traded Fund} (LETF) when the underlying Exchange Traded Fund (ETF) exhibits both local volatility and jumps of either finite or infinite activity. Our main results are closed-form expressions for the leading order terms of off-the-money European call and put LETF option prices, near expiration, with explicit error bounds. We show that the price of an out-of-the-money European call on a LETF with positive (negative) leverage is asymptotically equivalent, in short-time, to the price of an out-of-the-money European call (put) on the underlying ETF, but with modified spot and strike prices. Similar relationships hold for other off-the-money European options. In particular, our results suggest a method to hedge off-the-money LETF options near expiration using options on the underlying ETF. Finally, a second order expansion for the corresponding implied volatility is also derived and illustrated numerically.
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Cited in
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- Robust long-term growth rate of expected utility for leveraged ETFs
- Leveraged ETF implied volatilities from ETF dynamics
- LONG-TERM GROWTH RATE OF EXPECTED UTILITY FOR LEVERAGED ETFs: MARTINGALE EXTRACTION APPROACH
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- Robust hedging of options on a leveraged exchange traded fund
- Short-time implied volatility of additive normal tempered stable processes
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