Название: Inflation-Linked Bonds and Derivatives: Investing, hedging and valuation principles for practitioners
Автор: Jessica James, Michael Leister, Christoph Rieger
Издательство: De Gruyter
Год: 2023
Страниц: 132
Язык: английский
Формат: pdf (true), epub
Размер: 10.2 MB

Disruptions in supply chains and consumption patterns triggered by the pandemic together with stimulus packages and the energy crisis have catapulted inflation rates to levels last seen in the 1970s. For inflation markets, it’s hard to understate this sudden and enormous change in fortunes. Understanding the future evolution of consumer prices has become crucial for investors across all asset classes as central banks tailor their policy responses with a view to anchoring inflation expectations.

Inflation-Linked Bonds and Derivatives condenses more than 15 years of dedicated coverage of inflation markets. It provides investors, issuers and policy makers with all the relevant tools to navigate inflation markets, starting with the nuts and bolts of consumer price indices, forwards, carry and trading strategies, to advanced topics like seasonality adjustments and the use of inflation options.

With its many illustrative graphs and tabulated data, this exceptional book will benefit traders, corporate treasury departments, fixed income investors, insurance companies and pension funds executives.

In Chapter 1, “Inflation Indices,” we introduce the concept of inflation-linked products and inflation indices, which determine the payouts of these products. We describe the main European inflation index family, the HICP and associated indices, and describe the history of this index which has undergone several revisions over the last decade. We see how well the index represents actual experienced inflation. We then move on to the main US inflation indices, the US CPI and PCE, and discuss how they are constructed and how well they represent US inflation.

In Chapter 2, “The CPI linkage, the Concept of Break-even Inflation, and the Deflation Floor,” we build on the on the indices introduced in Chapter 1 and go into the details of how to calculate these reference indices and how index-linked bonds ensure investors receive a certain real return. We then go on to discuss break-even inflation, which links traded inflation products to the real world, and following on from this, the deflation floor, which comprises the unique behavior of products whose strike levels lie close to or at the zero value of actual inflation – the border between inflationary and deflationary environments.

Chapter 3, “Inflation-linked Products and Curves,” begins with a discussion of the motivations of market participants for buying inflation-linked products, and how well these products tend to deliver. We go on to look at inflation-linked product supply/demand, volumes and the type of investors who trade them. Linker issuance tends to have a strongly seasonal pattern which we examine. Next we look at inflation curves and introduce the concept of break-even inflation, that level of future inflation at which market participants become indifferent to inflation linked or nominal bonds – in other words, a way to derive what market participants will pay to lock in a value of future inflation.

Chapter 4, “Forwards, Carry and Trading Strategies,” begins to go into the reality of trading in this market.

Moving on to Chapter 5, “Inflation Expectations, Seasonality and Base Effects,” we tackle the central issue of future inflation. Where do people think that inflation will go? Up, down, static?

In Chapter 6, “Risk Measures and Risk Premia,” we examine the nature of risk in the inflation market. It’s usual to assign the work ‘risk’ to volatility – i.e., price variability, usually related in the literature as the standard deviation of returns.

Finally in Chapter 7, “Inflation Options,” we discuss inflation derivatives and whether their implicit “view” of the future is a useful forecast. Though inflation options have been mentioned before, this chapter treats them in detail.