Inflation-linked swaps

The UK market in inflation-linked swaps has existed since the early 1990s. In the last five years, there has been a steady growth in volume and lengthening of maturities. The recent developments in the Eurozone inflation derivatives market show that we can very quickly move from a nonexistent market to a multi-billion Euro market in a matter of a few months. 

What is worthy then of a further investment of cash to purchase this second edition Hopefully the new chapters on asset swap spread relative value, convertible bonds, callable/putable bonds and floating-rate notes will be sufficient justification additionally we have updated the previous chapters on inflation-linked bonds and risky corporate bonds valuation. We have also included Excel spreadsheets that enable the reader to apply the analysis described in the chapters right away to bonds that he or she selects. 

Inflation-Linked Bond Swap, This is also known as a synthetic index-linked bond. It is a swap with the following two cash flow legs ... 

This converts existing conventional fixed- or floating-rate investments into inflation-linked investments. An example of such a swap follows. 

Real annuity swap. A real-annuity swap is used to hedge inflation-linked... 

These swaps are among the most commonly traded. The fixed rate quoted for the swap provides a ready reference point against which to compare expected future rates of inflation. So, for instance, if a bank is quoting for a swap with a fixed rate of 3-00 percent, and an investor believes that inflation rates will not rise above 3-00 percent for the life of the swap, then it will receive fixed (here meaning a fixed rate of growth) and pay inflation-linked on the swap. 

The net cash flow leaves the pension fund receiving a stream of cash flow that are linked to inflation. The fund is therefore hedged against its liabilities. In addition, because the swap structure can be tailor-made to the pension fund s requirements, the dates of cash flows can be set up exactly as needed. This is an added advantage over investing in the IL bonds directly. 

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