Models for Pricing Inflation Derivatives

Specialeforsvar ved Jakob Brix

Titel: Models for pricing Inflation Derivatives

Abstract: We derive the exact distribution of the processes in the solved Jarrow-Yildirim inflation model. The results are used for derivation of closed form solutions to the Zero Coupon Index Inflation Swap, the Year-on-Year Index Inflation Swap, and options on year-on-year inflation rates. We calibrate the model to observed market data and simulate it in order to estimate exotic inflation option prices and counterparty exposure profiles. We present an extension to the Jarrow-Yildirim model where a volatility parameter follows a stochastic Cox-Ingersoll-Ross process in an effort to remedy some shortcomings of the Jarrow-Yildirim model. Finally we briefly present a Multi-Factor SABR Model for Forward Inflation Rates where we derive the closed form solution to an Inflation Cap/Floor and calibrate the model to observed inflation option prices.

Vejleder:  David G. Skovmand
Censor:   Cathrine Jacobsen, ATP