Valuing Tips bond futures with the Jarrow-Yildirim model
Hongming Huang and Yildiray Yildirim apply the Jarrow-Yildirim model to derive a closed-form solution for Treasury inflation-protected securities (Tips) futures. With the issuance of inflation-protected bonds and the impact of inflation on financial markets, Tips bond futures are expected to be issued to hedge the market risk of Tips bonds. Thus, this article provides a useful analytic solution for the fair pricing of Tips bond futures
Treasury inflation-protected securities (Tips) were first issued in the US fixed-income market in January 1997. After almost 10 years, the market capitalisation of the Tips bond market was $306 billion, which is around 8% of the market capitalisation of the nominal treasury securities.1 Tips bonds pay a constant coupon rate that is fully adjusted for inflation, based on the consumer price index for all urban consumers (CPI-U).2 By this adjustment mechanism, Tips investors can be immunised
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