To me, these CME CPI futures look like the missing link in the exchange-traded universe. But nobody else seems to care. Is this because...1) difficult for a market-maker to replicate?2) Fed holds CPI steady, hedgers get screwed by the dispersion (crude oil up, Cisco down)?3) ??

I am interested to know why one would prefer to trade CPI futures to the spot/ forward Break Even Inflation.Thank you.

I don't think (1) is at all a readon, and I'm not too sure what you mean by (2).My understanding is that the main players interested in trading CPI are bond traders, who would gain CPI exposure through TIPS strips (since coupon strips are really straight certificates on the value of CPI-U on their coupon date and go out almost 30 years). TIPS are easy enough to trade in size, on repo/reverse repo, to hedge longer-term inflation exposure without rolling over futures, and have built in put options on the principal strip. Without too much demand to do such trades on an exchange, the CPI futures are left in the world of video phones, which have no value to you since not a lot of people are already using them...

How would one hedge the CPI exposure using TIPS? (not clear about the procedure). TIPS provide protection against the inflation/ CPI et al but how would they help reduce the CPI exposure held outside of them?N

QuoteOriginally posted by: poochieI am interested to know why one would prefer to trade CPI futures to the spot/ forward Break Even Inflation.Because I don't know what that is, and I've never seen it on my Reuters screen? I'm guessing that is an OTC derivative, promoted by salespeople. But if a dealer gets stuck on one side or the other, would it hurt to show some size on the CME?Perhaps I find myself in the sorry position of being the only piker who has any interest in these things! I would also like an exchange-traded renminbi NDF if they had it, or at least some better contracts on InTrade.QuoteOriginally posted by: exotiqMy understanding is that the main players interested in trading CPI are bond tradersAren't bond traders ultimately stand-ins for actual borrowers and lenders? In other words, don't they always eventually want something which a lender or borrower wants, the same way an oil trader always wants whatever an oil company or motorist wants?QuoteOriginally posted by: exotiqTIPS are easy enough to trade in sizeI kinda thought cash stocks were, too. But so far as replication, I kinda meant building inflation out of something other than inflation - normal bonds... egg futures - certainly TIPS are arbitraged against something other than their own deck, right?QuoteOriginally posted by: exotiqto hedge longer-term inflation exposure without rolling over futuresI thought a more natural pairing might be with Eurodollar futures, which are pretty liquid.QuoteOriginally posted by: exotiqbuilt in put options on the principal stripI don't understand. Does this have something to do with redeemed principal never going down with deflation?

QuoteOriginally posted by: farmer QuoteOriginally posted by: exotiqMy understanding is that the main players interested in trading CPI are bond tradersAren't bond traders ultimately stand-ins for actual borrowers and lenders? In other words, don't they always eventually want something which a lender or borrower wants, the same way an oil trader always wants whatever an oil company or motorist wants?Yes they are. I collectively refer to them as "bond traders" because Futures vs. TIPS is not a question of demand, but of means and execution.QuoteQuoteOriginally posted by: exotiqTIPS are easy enough to trade in sizeI kinda thought cash stocks were, too. But so far as replication, I kinda meant building inflation out of something other than inflation - normal bonds... egg futures - certainly TIPS are arbitraged against something other than their own deck, right?I'm not sure why CPI would have to have more than one class of arbitrageable instruments...the government is one of the few natural sellers of inflation (since the nominal value of their tax claim on the economy is naturally indexed), and it runs the bureau that officially calculates inflation, so I take it as a pleasant surprise that anyone else is willing to come out with a sizeable product on it at all. The most "literal" arb against TIPS might be to trade against the basket of 30K-odd goods the BLS uses to calculate the price index, but I know that isn't practical...QuoteQuoteOriginally posted by: exotiqto hedge longer-term inflation exposure without rolling over futuresI thought a more natural pairing might be with Eurodollar futures, which are pretty liquid.Maybe...I haven't looked at it that way; most of the inflation positions I have taken were to hedge long-term structured products of decent size, for which it is more practical to buy a bulk of TIPS strips once (or perhaps do an inflation swap) rather than worrying about rolling over futures over the life of the option. I personally don't trade short-term rates, but I understand Eurodollar futures are useful to fine-tuning the short-term rate risk of dynamic books/portfolios, while interest rate swaps are customer products for "trade it and forget about it" hedges.QuoteQuoteOriginally posted by: exotiqbuilt in put options on the principal stripI don't understand. Does this have something to do with redeemed principal never going down with deflation?That's right: if you are long a principal TIPS strip and short a coupon TIPS strip of equal value and pay date, your net position is long a european put on CPI-U, struck at the CPI-U value at issue. BTW, the principal can go down with inflation in the interim, but you are guaranteed to get no less than your principal at maturity, hence the embedded option.QuoteOriginally posted by: Greenspoon How would one hedge the CPI exposure using TIPS? (not clear about the procedure). TIPS provide protection against the inflation/ CPI et al but how would they help reduce the CPI exposure held outside of them?N C'mon N, that should be easy for you to figure out (but don't worry, I won't tell Francis on you): TIPS strips are straight exposure to CPI-U, especially when the coupon rate is nice and round like those on the 2% TII 7/15/2014. On 1/15/2006, for example, the coupon you will receive is 1%*(principal) , where principal per is, say, $1,000*(CPI-U on 1/15/2006)/(CPI-U on issue date 7/15/2004). So buying the a coupon strip gives me spot exposure to the inflation between the now and the day the coupon is paid out. Taking a long/short position between two of them gives me exposure to forward inflation, etc. I guess the answer to your question is that TIPS strips ARE CPI exposure; the only inflation risk outside of them is the degree to which CPI does not really measure inflation (since it certainly doesn't track my cost of living ).Thanks for the lively macro discussion...