Abstract
Many financial institutions trade inflation derivatives these days in order to hedge their inflation risk. In risk-managing these derivatives, they need a valuation and risk framework. The key component for the valuation of inflation derivatives is the forward index curve. With this curve and a nominal discount curve, all linear inflation derivatives can be valued. In risk-managing an inflation book, the risk manager faces some risks specific for inflation derivatives such as inflation and seasonality risk. Besides linear derivatives, a number of nonlinear inflation derivatives exist in the market whose valuation is volatility sensitive. Keywords: inflation derivatives; zero-coupon inflation swaps; year-on-year inflation swap; real swaptions; curve building; Jarrow-Yildirim model
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