Inflation Derivatives and Index-Linked Bonds

The market for inflation derivatives and other index-linked products is constantly evolving. This programme covers the mechanics of the instruments, their valuation and how they can be used to take or hedge inflation exposure alone or embedded in other structures. Seasonality and convexity when using these products is also analyzed.

More than half of the programme is devoted to practical small group sessions. These intensive exercises include simulations using Microsoft Excel or other industry standard software. Participants will be able to take away worked examples including a number of Excel functions and macros.

• Traders
• Risk managers
• Fund managers
• Project finance and structured finance practitioners
• Accountants, auditors, consultants, and anyone interested in the use and operation of index linked securities and their derivatives

• Understand the mechanics of index-linked bonds and inflation derivatives
• Gain clarity on the fundamental issues raised when inflation exposure is being managed
• Analyze relative value in the index-linked and nominal bond markets through asset swaps
• Understand the impact of seasonality on inflation swaps and related products
• Learn how to use inflation derivatives for trading and managing risk
• Understand the similarities and differences between options on interest rates and inflation
• Gain familiarity with embedded inflation options

Basic understanding of bonds and interest rate derivatives, intermediate maths and Excel skills.

Preferably, delegates should have taken the LFS Interest Rate Derivatives and Swaps course or be completely familiar with the details of what is covered in that programme.

The Building Blocks

• Measures of inflation
• Inflation and deflation drivers
• Market participants
• The mechanics of index-linked bonds
• Variations in index-linked bond structures and embedded optionality
• Break-even inflation from bonds
• The limitations of break-even inflation
• Building an accurate inflation curve from bonds with B-Spines and regression

Workshop: Building an accurate inflation curve from bonds

Introduction to Inflation Derivatives

• Zero Coupon, Revenue and Year on Year 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
• Inflation Sensitivity IE01, DV01 convexity, and correlation

Workshop: Pricing and using zero coupon and revenue swaps with seasonality

Inflation Derivatives in Use

• Sensitivity measures applied to index-linked bonds
• Asset swaps in general
• Par and proceeds asset swaps with index-linked bonds
• Residual swap risk
• Inflation derivatives in public project financing (PFI structure)
• Why zero coupon and year on year inflation are different
• Forward inflation and convexity corrections

Workshop: Further uses of inflation swaps: risk and valuation of revenue swaps with seasonality

Inflation Options and Related Products

• Inflation caps and floors
• LPI embedded options and path dependency
• Inflation volatility considerations
• Applying standard interest rate option models to inflation?
• Index-linked notes
• Hybrid products with inflation protection
• Inflation protection in retail products

Workshop: Embedded inflation options