Understanding Inflation and Inflation-Linked Products by Brice Benaben

Understanding Inflation and Inflation-Linked Products 

Presenter: Brice Benaben: Managing Director and Head of Inflation Research, New Sky Capital

Video Lectures:

Section 1 (Running Time: 1.16.01)

  • Introduction: forecasting inflation
  • Curves and Sensitivities
  • At the beginning… the linkers
  • The imperfect link between “linkers” and “conventionals”
  • Disconnection between “linkers” and “conventionals”

Section 2 (Running Time: 1.04.45)

  • Recent flows: hedging swaps with bonds
  • Development of the derivatives
  • Change in models
  • ZC swaps: lag and rebasing
  • Asset swaps: the link between the cash and derivatives markets

Section 3 (Running Time: 39.18)

  • Developments of Structure Notes
  • LDI demand
  • Latest developments
  • Last word


Part 1: Inflation, From Economic Indicator into a Financial Instrument  

  • Forecasting inflation: Philips Curve and impact of QE, forward guidance)
  • From macro-economic model into financial model: Fisher equation and inflation risk premium
  • Short term inflation: impact of commodity, currency shocks
  • Short term inflation: impact on 1) Inflation reset products and on 2) the carry of inflation linked products

Part 2: Inflation Products, From Understanding Their Structure into Trading Them

  • Evolution of the linear inflation instruments
  • Inflation-linked bonds: structure (multiplicative and additive structure) and important features (seasonality, carry, floor option)
  • Building tools to analyse the inflation-linked bonds (carry, seasonality, option adjustments)
  • Inflation swaps: the different structure
  • Building a forward CPI curves
  • Link between Inflation bonds and swap: ASW
  • Building tools to calculate accurately the ASW (par-par, net proceeds, z-spread)

Part 3: Modelling Inflation-linked Products

  • Evolution of inflation modelling: JY models and Market models
  • A closer look at the convexity adjustment
  • Example of the models’ calibration
  • Risk: a segmentation of the risk
  • Examples of risk projections

Part 4: Inflation Option

  • Evolution of the inflation option: YoY cap/floor, ZC cap/floor, real yield option
  • Understanding the smiles (UK, Euro-zone, US)
  • Example of inflation option pricers