At a time when unconventional monetary policy has caused uncertainty about the global inflation outlook to rise considerably, Inflation Markets provides a complete and cohesive guide to fast-growing inflation markets and products, encompassing supply and demand dynamics, economics, financial modelling and trading aspects of inflation markets. Inflation derivatives markets have evolved and become more standardised and liquid in recent years. The wider investment community can no longer afford to ignore the asset class, and there is a large pool of investors who are looking to gain a better understanding. More and more pension schemes and insurance companies are beginning to understand the need to identify and hedge inflation exposures. This new book will deliver, for the first time, an applied, complete reference book for all types of inflation market participants. Inflation Markets is a timely and much needed resource for those new to the topic and the market from a variety of backgrounds.
The book provides readers with a complete and consistent framework in which to understand and analyse inflation markets and they will gain invaluable practical knowledge of managing and hedging inflation risks.
Paul Canty and Markus Heider Paul Canty is a Managing Director and European Head of Inflation Trading at UBS in London. He has had several technical articles published in the field of inflation-linked securities and he was a contributing author to the book 'Inflation Risks and Products' published by Risk Books. Paul holds a BSc in Mathematics from Nottingham University and an MSc in Financial Mathematics from Kings College London. He started his career as a Chartered Accountant with Ernst & Young. Markus Heider is Global Head of Inflation Research at Deutsche Bank Global Markets. Before joining DB he was a university lecturer. Markus holds a PhD in economics with a dissertation topic on inflation. He has been a speaker at numerous inflation conferences.
Table of contents 1 Consumer Price Inflation 1.1 Introduction 1.2 Consumer Price Indices 1.3 Some conceptual issues 1.4 Time series decomposition 1.5 Seasonality in CPIs 1.6 Extracting the trend - indicators of 'core' inflation 1.7 Forecasting inflation 1.8 Appendix 2 Inflation-linked Bonds 2.1 Introduction 2.2 Inflation protection 2.3 ILB conventions for main issuers 2.4 Real Yields 2.5 Breakeven Inflation 2.6 Seasonality & Carry 2.7 Risk measures 2.8 Beta and bond hedging approaches 2.9 Risk management approaches 2.10 Appendix 3 Inflation-linked Derivatives 3.1 Introduction 3.2 Zero coupon inflation swaps 3.3 Inflation-linked asset swaps 3.4 Year-on-year inflation swaps 3.5 Exchange traded futures markets 3.6 Inflation options 3.7 Indices - bond and swap total return indices 3.8 Appendix 4 Pricing and modelling inflation-linked derivatives 4.1 Introduction 4.2 Building an inflation curve 4.3 Calibrating the inflation curve 4.4 Constructing the short end of the curve 4.5 Curve classification 4.6 Valuing derivatives 4.7 Appendix 5 Assessing relative value in inflation-linked markets 5.1 Introduction 5.2 Adjusting ILB valuations for seasonality 5.3 Adjusting ILB valuations for optionality 5.4 The real bond yield curve as a benchmark 5.5 The nominal swap curve as a benchmark: Simple ASW measures 5.6 Assessing ILB value relative to the nominal bond curve 5.7 A synthetic nominal bond as fair comparator 5.8 The nominal bond curve as a benchmark: CPI swap richness 5.9 The inflation basis 6 Supply and demand for inflation-linked products 6.1 Introduction 6.2 Supply of inflation 6.3 Demand for inflation 6.4 Inflation-linked asset swappers 6.5 Inflation as a funding tool 6.6 Inflation within other asset classes 6.7 Appendix - constructing an amortising ILB to hedge a real annuity 7 The drivers of breakeven inflation 7.1 Introduction 7.2 Inflation expectations 7.3 Risk and liquidity premia 7.4 The inflation risk premium 7.5 The Liquidity Premium 7.6 Modelling breakeven inflation 8 The main inflation markets 8.1 Introduction 8.2 The US market 8.3 The Euro-area market 8.4 The UK market 8.5 The Brazilian market 8.6 The Japanese market 8.7 The Canadian market 8.8 The Swedish market 8.9 The Australian market 8.10 Other markets