Inflation-linked products

Inflation-linked derivative instruments are now widely traded in the capital markets divisions of investment banks that trade the sovereign inflation-linked bonds. Many smaller banks with regional dominance are also building up their trading capabilities as they rise to meet the increasing demand from their client base for inflation-linked products. 

Inflation derivatives are an additional means by which market participants can have an exposure to inflation-linked cash flows. They can also improve market liquidity in inflation-linked products, as an earlier generation of derivatives did for interest-rates and credit risk. As flexible OTS products, inflation derivatives offer advantages over cash products in certain circumstances. They provide ... 

Where are the new opportunities to improve portfolio performance by creatively expanding the investable asset domain There are several assets that are now increasingly accepted and utilized in portfolios. The most important are hedge funds, private equity, and venture capital. Other new assets have shown the ability to improve portfolio performance but for various reasons have not yet made the leap to widespread recognition. These include inflation-protected securities and insurance-linked products. 

Assessments, energy, 1578-1579 Asset classes, 758-761 currencies, 761 enhanced index products, 761 hedge funds, 759, 760 insurance-linked products, 761 private equity and ventme capital, 759-761 Treasury inflation-protected securities (TIPs), 761... 

The first step for estimating future streams is to know the expected inflation. To do this, the procedure needs the future trend of index in which the inflation expectation is built. The inflation expectation determined by countries is based on a different basket of products and services. For instance, inflation-linked bonds issued in the United Kingdom or UK index-linked gilts, are linked to the Retail Price Index (RPI) inflation-linked bonds issued in the United States or TIPS are linked to the Consumer Price Index (CPI). Table 6.1 summarizes the key global inflation indices used by the major issuers of inflation-linked bonds. 

The AFT has steadily increased linker issuance since the product was launched, and currently targets approximately 10% of gross issuance in inflation-linked. Its commitment to a stable issuance pattern was reemphasised prior to the launch of the OATef 12 in October 2001. AFT maintains some discretion over which issues to auction and when, and is sensitive to expected market demand for that issuance. 

In the United States, Canada, and New Zealand, indexed bonds can be stripped, allowing coupon and principal cash flows to be traded separately. This obviates the need for specific issues of zero-coupon indexed securities, since the market can create products such as deferred-payment indexed bonds in response to specific investor demand. In markets allowing stripping of indexed government bonds, a strip is simply a single cash flow with an inflation adjustment. An exception to this is in New Zealand, where the cash flows are separated into three components the principal, the principal inflation adjustment, and the inflation-linked coupons—the latter being an indexed annuity. 

At present, cost estimates for electricity production are even higher. For example, in Turkey, the discussion with Rosatom focusses on a fixed price Power Purchase Agreement for 15 years under a Build-Own-Operate scheme the weighted average cost is US 123.5/MWh and the quantity of electricity is fixed. In the UK, EDF has been offered an investment contract for Hinkley Point C (ie, the construction of UK s first nuclear plant in 28 years) with a strike price for its electricity output of GBP 92.50 (ie, 125 in 2012 prices) per MWh, which will be adjusted (linked to inflation) during the construction period and over the subsequent 35-year tariff period this strike price for electricity from Hinkley Point C is roughly twice the current wholesale price of power. 

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