Valuation of Inflation Swap Volatility Under a Market Model and Pricing of Real Yield Options

Posted: 18 Oct 2004

See all articles by Nabyl Belgrade

Nabyl Belgrade

CDC Ixis Capital Markets

Eric Benhamou

A.I. Square Connect; LAMSADE- Paris Dauphine University

Yosr Khlif

CDC Ixis Capital Markets

Date Written: October 15, 2004

Abstract

The inflation market, despite its exploding growth remains not very liquid except for vanilla derivatives. And unlike interest rates, it does not yet offer liquid and reliable swaption prices. Key objective of this paper is to compute inflation swaption volatility from liquid year on year volatility. Following a similar method as for the derivation of swaption volatility from interest cap in a market model, we derive a closed form solution for the inflation swaption volatility. We examine various more simple methods to compare our relative value computation. Using this estimate of the inflation volatility, we compute not only inflation swaption but also options on real yield and inflation spreads.

Keywords: Inflation swaption, year-on-year volatility, implied volatility, correlation, real yield option

Suggested Citation

Belgrade, Nabyl and Benhamou, Eric and Khlif, Yosr, Valuation of Inflation Swap Volatility Under a Market Model and Pricing of Real Yield Options (October 15, 2004). Available at SSRN: https://ssrn.com/abstract=605608

Nabyl Belgrade (Contact Author)

CDC Ixis Capital Markets ( email )

47 quai d'Austerlitz
Paris, 75013
France
0033 (0)158551556 (Phone)

Eric Benhamou

A.I. Square Connect ( email )

35 Boulevard d'Inkermann
Neuilly sur Seine, 92200
France

LAMSADE- Paris Dauphine University ( email )

Place du Marechal de Lattre de Tassigny
Pais, 75016
France

HOME PAGE: http://https://www.lamsade.dauphine.fr/

Yosr Khlif

CDC Ixis Capital Markets ( email )

56 rue de Lille
75356 Paris Cedex 07
France

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