Defaultable inflation swap

Duaivadlo · January 7th, 2005, 4:19 pm

Would anybody know of some litterature regarding defaultable inflation swaps? (i.e. an inflation swap where cashflows stop as soon as some predefined bond defaults).Many thanks in advanceDuaivadlo

xdlyn · July 13th, 2007, 9:24 am

I would think this is in fact an inflation linked CDS when you try to price it. In fact, if a utility company issues an inflation linked bond, it falls into the same pricing model. Use both nominal interest and credit curve for discounting and inflation curve for estimating the inflation leg cashflows.

Martinghoul · July 20th, 2007, 6:52 pm

Never heard of an instrument like that used in practice... Should be easy enough to model using a CDS and a linker, but I have never heard of anything like it... My 2c.