Onwards and upwards

After several years of talk, the inflation options market finally seems to be building up steam. Liquidity is improving and a wider variety of users is trading the product. Duncan Wood looks at the development of the market

As a product, inflation options have been around for a good five years. Until this year, however, there was nothing resembling a market. Inflation options were traded infrequently, typically in small sizes between a dealer and a client, and the exposure that banks took on often remained unhedged. The arrival this year of a new breed of structured note - inflation range accruals - has changed all that.

Range accrual notes - an established structure in the interest rate market but new to inflation