Affine Model of Inflation-Indexed Derivatives and Inflation Risk Premium
51 Pages Posted: 18 Oct 2011 Last revised: 12 Nov 2012
Date Written: October 18, 2011
This paper proposes an affine-based approach which jointly captures the nominal interest rate, the real interest rate, and the inflation risk premium to price inflation-indexed derivatives, including zero-coupon inflation-indexed swaps, year-on-year inflation-indexed swaps, inflation-indexed swaptions, and inflation-indexed caps and floors. We provide an example and explain how to use traded zero-coupon inflation-indexed swap rates to estimate inflation risk premiums.
Keywords: inflation-indexed derivatives, inflation risk premium
JEL Classification: C15, G13
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