Abstract
This paper discusses the valuation of financial instruments whose payoff is linked to an index. Examples are TIPS, wage-indexed pension fund liabilities, and GDP bonds. Valuation of these primary assets by replication is typically not possible as the index cannot be hedged perfectly with (nominal) market instruments. This paper discusses several methods to find a value in such incomplete markets and advocates utility-based valuation. This approach implies a simple adjustment on the discount factor.
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