Inflation-linked Bonds and Derivatives

The objective of this seminar is to give you an introduction to the mechanics, pricing and applications of inflation-linked bonds and inflation-linked derivatives.

We start with a general introduction to inflation and inflation-linked products. We explain why and how inflation (or deflation) arises and we discuss possible impacts of inflation (deflation) on the returns of various types of investment instruments. We also explain various measures of inflation, forward inflation, and we give an overview of stochastic models for inflation.

We then take a closer look at inflation-linked bonds. We explain the mechanics of TIPS, French OATIs, UK Index-Linked Bonds etc. We give examples of the nominal and real cash flows of these bonds and we explain and demonstrate how real yield and real interest rate sensitivities are calculated. We also give examples of investment and trading strategies with inflation-linked bonds.

Further, we give an overview and explain the mechanics and applications of inflation-linked derivatives such as inflation futures, inflation swaps and inflation caps, floors and options. We also give examples of their applications in risk management.

Finally, we present and discuss case studies of how inflation-linked products can be used for managing inflation risk in asset-liability management context, for constructing inflation linked structured products and for trading purposes.

 

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 10.15 General Introduction to Inflation-Linked Products

• Overview of Inflation-Linked Products, Markets, Issuers and Investors
  • Some typical products
  • Historical development
• The Rationale for Inflation-Linked Products
  • Why are inflation products currently so popular?
• A Closer Look at Inflation
  • Basic terminology (retail basket and seasonality)
  • Measuring inflation
  • Inflation indices (UK RPI, Eurozone HICP, US CPI)
  • Estimating forward inflation and convexity adjustments
  • Stochastic models of inflation (overview)
  • Building an inflation curve from bonds

10.15 - 10.30 Coffee Break

10.30 - 12.00 Inflation-Linked Bonds and Notes

• Mechanics and Concepts
• US TIPS, UK Inflation-Linked Gilts, French OATis
• Yield Calculations, Break-even Inflation and Sensitivity Analysis
• Inflation-Linked Bond Trading Strategies
• Small Exercise

12.00 - 13.00 Lunch

13.00 - 14.30 Inflation-Linked Derivatives

• Inflation Swaps
  • Zero-coupon inflation swaps
  • Revenue inflation swaps
• Inflation Caps and Floors
• TIPS Options
• Inflation Swaptions
• Inflation Futures
• Pricing and Valuation of Inflation-Linked Derivatives
• Small Exercise

14.30 - 14.45 Coffee Break

14.45 - 16.15 Inflation Derivatives Applications

• Managing Inflation and/or Deflation Risks in Asset-liability Management Context
• Constructing Inflation Linked Structured Products
  • Index linked guaranteed performance notes
  • Inflation volatility considerations
• Examples of Hybrid Products with Embedded Inflation Options
• Practical Trading Applications
  • Post-crisis approaches to trading inflation derivatives

16.15 - 16.30 Summary, Evaluation and Termination of the Seminar