publication . Preprint . Report . Article . 1989

Inflation Insurance

Zvi Bodie;
Open Access
  • Published: 01 Jun 1989
Abstract
A contract to insure $1 against inflation is equivalent to a European call option on the consumer price index. When there is no deductible this call option is equivalent to a forward contract on the CPI. Its price is the difference between the prices of a zero coupon real bond and a zero coupon nominal bond, both free of default risk. Provided that the risk-free real rate of interest is positive, the price of such an inflation insurance policy first rises and then falls with time to maturity. It is a decreasing function of the real interest rate and an increasing function of both the expected rate of inflation and the real risk premium on nominal bonds. When a d...
Subjects
free text keywords: Economics and Econometrics, Accounting, Finance
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publication . Preprint . Report . Article . 1989

Inflation Insurance

Zvi Bodie;