Inflating interest

Structured products that combine views on inflation and interest rates have gained traction with European investors over the past year. Dealers claim the estimated EUR4 billion market is likely to double in size by the end of the year. But the complexity of these products is presenting challenges from a modelling perspective. By Jayne Jung

Structured product investors had a nasty shock at the start of this year. The dramatic flattening of the US dollar yield curve meant investors racked up millions of dollars mark-to-market losses on last year's must-have investment - constant maturity swap (CMS) spread option products. These products typically paid a high coupon for the first year, before switching to a payout based on the spread between two CMS rates at different maturities, usually the 10-year CMS rate minus the two-year CMS