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Inflation Cap
Hi Guys,I'm building a model to value inflation caps. First I'm doing some research on the most common available models. I would like to know which is/are (if there is/are) the standard model(s) used to value this contracts nowadays.Thank you.Cheers,J
Inflation Cap
black scholes ? except if you want to worry about deflation
knowledge comes, wisdom lingers
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- Joshua2004
Inflation Cap
the market quote premium in inflation cap. so there is no common agreement on the model to use. Shifted lognorm or normal model can give you implied vols. If you are talking about a smooth vol surface. SABR is a nature choice. For YOY cap, you need to consider convexity adjustment, probably JY is still the most popular model.
Inflation Cap
Normal Black does a very good job. In terms of hedging performance and of smoothness of calibration parameters.Then you can adjust a convexity correction using normal expansion (http://inflationinfo.com/CPICvx.pdf) or even fit one ala Benhamou , Belgrade market model or Jarrow Yildirim...(but too many parameters dont always make a good model).Then you also need a seasonality factor. A point in time econometric model (ARMAX would do the job) forecasting seasonality factors from CL1 futures as "future regressors" for example would be a good idea.