Valuing inflation futures contracts
In recent years, futures contracts written on inflation (specifically, on the ratio of the consumer price index (CPI) level at two different times) have been introduced. Working within the Jarrow & Yildirim (2003) model, John Crosby derives formulas for the theoretical values of these futures contracts in terms of the nominal and real yield curves and the CPI level
The market for inflation-linked derivatives has grown exponentially in recent years. This has resulted in futures contracts, written on inflation, being introduced in the US and Europe in order to give market participants hedging tools. These contracts also provide a vehicle for traders and speculators, such as hedge funds, to take positions that reflect their opinions about future inflation.
Indeed, the most recently published data (at the time this article was originally prepared in December
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