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Inflation Derivatives and Index Linked Bonds

Day One

Introduction and Course Outline

The Building Blocks

Workshop: Estimating the inflation term structure from bonds

  • The nature of inflation
  • Inflation and deflation drivers
  • Market participants
  • The mechanics of index linked bonds
  • Break-even inflation from bonds
  • The limitations of break-even inflation
  • Building an accurate inflation curve from bonds with B-Spines and regression

Introduction to Inflation Derivatives

  • Inflation futures
  • Zero coupon inflation swaps
  • Revenue inflation swaps
  • Inflation swap mechanics and the market
  • Building an inflation curve from swaps
  • X11 seasonality adjustments for pricing derivatives
  • Relationship between the market for inflation linked bonds and inflation derivatives

Workshop: Zero coupon and revenue swaps with seasonality

Day Two

Inflation Derivatives in Use

  • Year on year inflation swaps
  • Why zero coupon and year on year inflation are different
  • Forward inflation and convexity corrections
  • Index linked asset swaps
  • Par and proceeds asset swaps with index linked bonds
  • Public project financing example (PFI structure)

Workshop: Using inflation swaps

Inflation Options and Related Products

  • Inflation caps and floors
  • Inflation volatility considerations
  • Inflation protection in retail products
  • Index linked guaranteed performance bonds
  • Examples of hybrid products with inflation protection

Workshop: Embedded inflation options