Infla tion-indexed Securities

Transcription

1 2008 AGI-Information Management Consultants May be used for personal purporses only or by libraries associated to dandelon.com network. Infla tion-indexed Securities Bonds, Swaps and Other Derivatives Second Edition Mark Deacon Andrew Derry and Dariush Mirfendereski John Wiley & Sons, Ltd

2 List of Exhibits List of Figures List of Tables About the Authors Foreword by Sir Edward George Preface to the Second Edition Acknowledgements Disclaimer List of Abbreviations xii xiii xvii xix xxi xxiii xxv xxvii xxix 1 What Are Inflation-indexed Securities and Derivatives? 1.1 A historical perspective 1.2 How indexed bonds work 1.3 The role of derivatives 2 Security Design 2.1 Choice of price index Index matching Index reliability and integrity Other practical considerations 2.2 Cash flow structure Capital Indexed Bond (CIB) Interest Indexed Bond (IIB) Current Pay Bond (CPB) Indexed Annuity Bond (IAB) Indexed Zero-Coupon Bond (IZCB) Other types of indexed bonds Cash flows of the different structures Factors that influence the choice of security design

3 vi Application of the index to the cash flows The problem of the indexation lag Why indexation lags are necessary How to minimise the indexation lag Full or partial indexation? The impact of tax regulations Uncertainty of post-tax real yields The effect of income accrual rules Options on indexed bonds Callable bonds Puttable bonds Convertible bonds Method of issue Pricing Cost -effectiveness and market development Consistency with other instruments What happens in practice? Summary Appendices A2.1 Calculating the base annuity payment for Indexed Annuity Bonds (IABs) A2.2 Barro s proposal for revising the inflation adjustment of payments on index-linked gilts 3 Why Invest in Indexed Debt? 3.1 Reducing inflation risk 3.2 Relative stability of returns Performance relative to conventional bonds and equities Total return opportunities 3.5 Duration and other cash flow considerations 3.6 Taxation 3.7 Liquidity 3.8 Other potential deterrents to investing in indexed bonds 3.9 Alternatives to indexed bonds Treasury bills Equities Property 3.10 Summary 4 Why Issue Indexed Bonds? 4.1 Why governments issue indexed bonds Reducing borrowing costs: the role of inflation expect ations Reducing borrowing costs: saving the inflation risk premium Risk management

4 Inflation-indexed bonds and monetary policy Maintaining long-term capital markets in difficult economic conditions 4.2 Why private corporations issue indexed bonds 4.3 The relative scarcity of index-linked bonds 4.4 Summary 5 Inflation and Real Interest Rate Analysis 5.1 Measures of real interest rates Real gross redemption yields Hedge ratios: the duration and beta of inflation-indexed bonds The term structure of real interest rates 5.2 Measures of inflation expectations Break-even inflation rates The inflation term structure The inflation risk premium and bond con rex t Y 5.3 Analysis of real interest rates and inflation expectations Real interest rates Measures of inflation expectations 5.4 Summary vii Major International Indexed Bond Markets 6.1 Australia Canada France Sweden A brief history of indexation in Australia The structure of the Commonwealth Treasury Indexed Bond (TIB) market The history of indexation in France The introduction of inflation-indexed OATS (Obligations assimilables du Tresor) Indexation to pan-european inflation - OAT i bonds The formation of the Swedish government index-linked bond market The development of the market toward international standards Recent developments United Kingdom A brief history of the index-linked gilt market The structure of the index-linked gilt market The market for non-government index-linked bonds in the UK United States of America A brief history of indexation in the USA

5 ... Vlll The launch of the Treasury Inflation-Indexed Securities (TIIS) market The expansion of the TIIS programme in the fiscal surplus years Recent developments in the market for inflation-indexed securities in the USA Appendices A6.1 Cash flow calculations for Australian Capital Indexed Bonds (CIBs) A6.1.1 Calculation of interest payments A6.1.2 Calculation of the settlement price A6.2 Cash flow calculations for Canadian Real Return Bonds (RRBs) A6.2.1 Indexing process A6.2.2 Calculation of interest payments A6.2.3 Calculation of the redemption payment A6.2.4 Calculation of the settlement price A6.3 Cash flow calculations for French OATi and OAT i bonds A6.3.1 Indexing process A6.3.2 Calculation of interest payments A6.3.3 Calculation of the redemption payment A6.3.4 Calculation of the settlement price A6.4 Cash flow calculations for Swedish index-linked Treasury bonds A6.4.1 Indexing process A6.4.2 Calculation of interest payments (for coupon-bearing bonds) A6.4.3 Calculation of the redemption payment A6.4.4 Calculation of the settlement price A6.5 Cash flow calculations for UK Index-linked Gilts (IGs) A6.5.1 Indexing process A6.5.2 Calculation of interest payments A6.5.3 Calculation of the redemption payment A6.5.4 Calculation of accrued interest A6.5.5 Calculation of real yields A6.6 Cash flow calculations for US Treasury Inflation-Indexed Securities (TIIS) A6.6.1 Indexing process A6.6.2 Calculation of interest payments A6.6.3 Calculation of the redemption payment A6.6.4 Calculation of the settlement price Other Indexed Bond Markets 7.1 Argentina 7.2 Austria 7.3 Bolivia

6 ix 7.4 Brazil Readjustable National Treasury Obligations (ORTNs) today National Treasury Obligations (OTNs), Treasury Bonds (BTNs) and National Treasury Notes (NTNs) Chile Colombia Czech Republic Denmark Finland Germany Greece Hungary Iceland India Ireland Israel Italy Japan Kazakhstan Mexico Netherlands New Zealand Norway Peru Poland Portugal South Africa Spain Switzerland Turkey 225 Appendices A7.1 Calculation of the settlement price for Colombian TES-UVR A7.2 A7.3 bonds A7.1.1 Calculation of the settlement price A7.1.2 Price calculation example Calculation of the settlement price for Icelandic Treasury Bonds A7.2.1 Indexing process A7.2.2 Calculation of the settlement price A7.2.3 Price calculation example Calculation of real yields for Israeli inflation-indexed bonds A7.3.1 Sagi and Galil bonds A7.3.2 Kfir bonds

7 X A7.4 Cash flow calculations for New Zealand Treasury inflation-indexed bonds A7.4.1 Calculation of interest payments A7.4.2 Calculation of the settlement price A7.5 Exchange rates 8 Inflation-linked Derivatives: Market Description 8.1 Overview Introduction Why Inflation-linked (IL) derivatives? The Inflation-linked (IL) derivatives markets in A brief history of Inflation-linked derivatives markets Early history The UK market The French and Euro-zone markets The Swedish market Non-European markets 8.3 Inflation payers (issuers) Standard derivative solutions for Inflation-linked (IL) issuers Private Finance Initiative (PFI) projects in the UK UK housing associations Swap structures to mitigate credit exposure 8.4 Inflation receivers (investors) The use of inflation swaps to hedge pension liabilities Inflation-guaranteed and Inflation-linked (IL) retail products 8.5 Inflation options Options embedded in bonds Standalone inflation options in the Over The Counter (OTC) market 8.6 Future trends Market standardisation Pension reforms in Europe The implications of changes to accounting standards Further development of the inflation derivatives markets Appendix A8.1 Example swap and option structures A8.1.1 Capital Indexed Bond (CIB)-style swaps A8.1.2 Real annuity swaps A8.1.3 Interest Indexed Bond (1IB)-style swaps A8.1.4 Standard inter-dealer broker market structures 9 Inflation-linked Derivatives: Pricing, Hedging and Other Technical Aspects 9.1 Outline 9.2 Pricing approaches What is meant by pricing?

8 Four levels of pricing Level I Level I Level Level IV Deriving a forward Consumer Price Index (CPI) curve for Level I1 and I11 markets Piecewise linear continuous function in CPI space Piecewise linear continuous function in inflation space Level I markets in Europe: intraregional Euro-zone inflation spreads Alternative approaches to the construction of inflation curves Asset swaps - connecting swap and bond prices Hedging a swapped new issue A simple interim hedge A more precise hedge A portfolio hedge for net outright inflation risk The evolution of the Euro-zone HICP swap market Seven lessons from seven months of Euro-zone inflation swap data Historical estimation of price index volatilities Pricing inflation options Zero percent zero-coupon floors Year-on-year inflation floors Summary xi Conclusion 297 References Bibliography Useful websi t es Index