Course description
Inflation Derivatives and Index-Linked Bonds
The market for inflation derivatives and other index-linked products is constantly evolving. This program 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 program 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.
Learning Objectives:
- 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
Upcoming start dates
Who should attend?
- 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
Training content
Day One
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
Day Two
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
Costs
The cost of the Inflation Derivatives and Index-Linked Bonds training course is available upon request.
Certification / Credits
London Financial Studies is registered with CFA and GARP Institute as an Approved Provider of continuing education programs. GARP & CFA Institute members attending this course are eligible for 16 CE/CPD credits
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