The purpose of this seminar is to give you a good understanding of tools and techniques for managing inflation risk.
We start with an overall introduction to the inflation concept and a good discussion of its financial and economic implications: Erosion of purchasing power, money illusion, wealth redistribution and potential misallocation of resources. We also explain how inflation is sought controlled through fiscal and monetary policy.
We then explain how inflation and inflation risk is measured and how widely used inflation indexes such as CPI, CPI-U, HICP, DP Deflator etc. are calculated and how they should be interpreted. We also explain how inflation risk is measured on a "stand-alone" basis and in the ALM context of DB pension funds and insurance companies.
The central part of the seminar will be focused on inflation linked products and their applications. We start with a thorough introduction to inflation-linked bonds ("linkers"). We describe their basic mechanics and we give detailed examples of linkers that are traded and used in practice. These include US TIPS, French OATIs, UK Index-Linked Bonds etc. We give examples of the nominal and real cash flows of these bonds and we explain and demonstrate how real yield and real interest rate sensitivities are calculated. We also give examples of investment and trading strategies with inflation-linked bonds.
Further, we give an overview and explain the mechanics and applications of inflation-linked derivatives such as inflation futures, inflation swaps and inflation caps, floors and options. We also give examples of their applications in risk management.
Finally, we explain and demonstrate how inflation risk can be managed in an ALM context using linkers, inflation derivatives and real assets. We explain how real liabilities can be formally matched with bonds and synthetics and we show how instruments can be blended with the goal of constructing real risk-return optimized portfolios under inflation constraints.
