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Inflation-indexed swaps and swaptions
Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
2008 (English)In: Journal of Banking & Finance, ISSN 0378-4266, E-ISSN 1872-6372, Vol. 32, no 11, 2293-2306 p.Article in journal (Refereed) Published
Abstract [en]

This article considers the pricing and hedging of inflation-indexed swaps, and the pricing of inflation-indexed swaptions, and options on inflation-indexed bonds. To price the inflation-indexed swaps, we suggest an extended HJM model. The model allows both the forward rates and the consumer price index to be driven, not only by a standard multidimensional Wiener process but also by a general marked point process. Our model is an extension of the HJM approach proposed by Jarrow and Yildirim [Jarrow, R., Yildirim, Y., 2003. Pricing treasury inflation protected securities and related derivatives using an HJM model. Journal of Financial and Quantitative Analysis 38, 409–430] and later also used by Mercurio [Mercurio, F., 2005. Pricing inflation-indexed derivatives. Quantitative Finance 5 (3), 289–302] to price inflation-indexed swaps. Furthermore we price options on so called TIPS-bonds assuming the model is purely Wiener driven. We then introduce an inflation swap market model to price inflation-indexed swaptions. All prices derived have explicit closed-form solutions. Furthermore, we formally prove the validity of the so called foreign-currency analogy.

Place, publisher, year, edition, pages
Elsevier, 2008. Vol. 32, no 11, 2293-2306 p.
Keyword [en]
Inflation; Index-linked; Derivatives; Swaps; Swaptions; Analogy
National Category
Economics
Research subject
Translation Studies
Identifiers
URN: urn:nbn:se:su:diva-103228DOI: 10.1016/j.jbankfin.2007.04.033OAI: oai:DiVA.org:su-103228DiVA: diva2:716492
Available from: 2014-05-09 Created: 2014-05-09 Last updated: 2017-12-05Bibliographically approved

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