Calibrating inflation

Market calibration of inflation models is important in actuarial work. This report shows how Hull & White models are calibrated against LPI swaps and discusses the valuation of forward starting contracts


The market-consistent valuation of liabilities linked to retail price inflation and, of more technical interest, capped and floored inflation has become an important element of actuarial work. This is due to both the requirements of the Financial Services Authority (FSA) in relation to the valuation of insurance liabilities, and the increasing focus of pension actuaries on mark-to-market valuation for accounting (FRS17) and hedging purposes.

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