Inflation-Adjusted Bonds, Swaps and Derivatives

The purpose of this paper is to review the literature on inflation-adjusted bonds, swaps, and derivatives. The methodology for valuation and risk management of these securities is an application of the foreign currency extension of a standard HJM term structure model. The two “currencies” in the extended model are real and nominal prices. Currently, for their use in monetary policy, the empirical literature primarily uses these models to estimate both the expected inflation rate and inflation risk premium. A literature investigating the efficiency of the inflation derivative markets and a comparison of the relevant valuation models is almost non-existent and a fruitful area for future research