Abstract
To cover inflation-linked derivatives under CVA simulations we need to add an inflation model component to the multi-currency model introduced so far. In this section we present two alternative modelling approaches and formulate them with LGM as a nominal rate model in order to integrate inflation into the Monte Carlo framework. The first approach is the model by Jarrow and Yildirim [99]. The second one is the model introduced by Dodgson and Kainth [58]. But before we dive into these, let us review standard inflation-linked products which are traded in the market, and some of which we will eventually use to calibrate the models. For an overview of the inflation market, products and valuation methods refer to [108, 33].
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© 2015 Roland Lichters, Roland Stamm, Donal Gallagher
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Lichters, R., Stamm, R., Gallagher, D. (2015). Inflation. In: Modern Derivatives Pricing and Credit Exposure Analysis. Applied Quantitative Finance. Palgrave Macmillan, London. https://doi.org/10.1057/9781137494849_13
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DOI: https://doi.org/10.1057/9781137494849_13
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-137-49483-2
Online ISBN: 978-1-137-49484-9
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