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Rational Models for Inflation-Linked Derivatives

Henrik Dam, Andrea Macrina, David Skovmand and David Sloth

Papers from arXiv.org

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.

New Economics Papers: this item is included in nep-mac and nep-rmg
Date: 2018-01, Revised 2018-03
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