Reducing approximation errors in LPI swaps

Joshua Xingzhi Zhang and Fabio Mercurio
24 Mar 2011

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A limited price index (LPI) is a UK inflation index used to define typical payout structures of UK pension plans. By definition, LPIs have annual returns that are equal to the corresponding annual UK inflation rates capped at y and floored at x, for some strikes x and y. The most common values for x and y are 0% and 5%, respectively.

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Reducing approximation errors in LPI swaps

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