Quadratic Gaussian inflation

Quadratic Gaussian inflation

inflation-road-sign

The liquidity and transparency of the inflation options market has increased considerably in recent years, with all major brokers now providing screens with prices of year-on-year and zero-coupon caps and floors at various strikes. These prices show that the inflation market is characterised by a pronounced smile and skew in implied option volatilities, with implied distributions of year-on-year forwards having pronounced fat tails. It is therefore important that inflation derivatives pricing

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