Convexity adjustments in inflation-linked derivatives

The market for inflation-linked derivatives has grown rapidly in recent years. Inflation is now regarded as an independent asset class. Actively traded inflation derivatives include standard zero-coupon inflation swaps, as well as more complicated products such as period-on-period inflation swaps (Mercurio, 2005), inflation caps (Mercurio, 2005), inflation swaptions (Kerkhof, 2005) and futures contracts written on inflation (Crosby, 2007).Dorje Brody is a reader in mathematics at Imperial Col