Rational Models for Inflation-Linked Derivatives

Henrik Dam; Andrea Macrina; David Skovmand; David Sloth

Rational Models for Inflation-Linked Derivatives

Henrik Dam, Andrea Macrina, David Skovmand, David Sloth

Institut for Matematiske Fag

Abstract

We construct models for the pricing and risk management of inflation-linked derivatives. The model is rational in the sense that affine payoffs written on the consumer price index have prices that are rational functions of the state variables. The nominal pricing kernel is constructed in a multiplicative manner that allows for closed-form pricing of vanilla inflation products suchlike zero-coupon swaps, caps and floors, year-on-year swaps, caps and floors, and the exotic limited price index swap. The model retains the attractive features of a nominal multi-curve interest rate model such as closed-form pricing of nominal swaptions. We conclude with examples of how the model can be calibrated to EUR data.

Originalsprog	Engelsk
Tidsskrift	arXiv.org
Status	Afsendt - 2019

Emneord

q-fin.PR
q-fin.MF

Adgang til dokumentet

https://arxiv.org/pdf/1801.08804.pdf

Citationsformater

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AU - Sloth, David

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N2 - We construct models for the pricing and risk management of inflation-linked derivatives. The model is rational in the sense that affine payoffs written on the consumer price index have prices that are rational functions of the state variables. The nominal pricing kernel is constructed in a multiplicative manner that allows for closed-form pricing of vanilla inflation products suchlike zero-coupon swaps, caps and floors, year-on-year swaps, caps and floors, and the exotic limited price index swap. The model retains the attractive features of a nominal multi-curve interest rate model such as closed-form pricing of nominal swaptions. We conclude with examples of how the model can be calibrated to EUR data.

AB - We construct models for the pricing and risk management of inflation-linked derivatives. The model is rational in the sense that affine payoffs written on the consumer price index have prices that are rational functions of the state variables. The nominal pricing kernel is constructed in a multiplicative manner that allows for closed-form pricing of vanilla inflation products suchlike zero-coupon swaps, caps and floors, year-on-year swaps, caps and floors, and the exotic limited price index swap. The model retains the attractive features of a nominal multi-curve interest rate model such as closed-form pricing of nominal swaptions. We conclude with examples of how the model can be calibrated to EUR data.

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