Inflation Insurance

Authors

  • Zvi Bodie Boston University

DOI:

https://doi.org/10.1016/1057-0810(91)90011-M

Abstract

This article uses the concepts of option theory to explore the possibility of providing annuities that offer partial protection against inflation at a cost acceptable to retirees. A contract to insure a future payment against inflation is equivalent to a European call option on the consumer price index. This equivalence makes it possible to apply the techniques of modern contingent claims analysis to the production and pricing of inflation-protected annuities that have deductibles and caps. The method synthesizes a CPI call option through a dynamic trading strategy of borrowing and investing in CPI-linked bonds. The price of the insurance is the cost of implementing the strategy. The article also considers the question of who can provide the CPI-linked bonds that are the ultimate basis for the inflation insurance. l?ie Journal of Risk and Insurance, Vol. LVII, No. 4 (December 1990), pp. 634-645. (Reprinted with permission of The Journal of Risk and Insurance.)

Published

1991-06-30

How to Cite

Bodie, Z. (1991). Inflation Insurance. Financial Services Review: The Journal of Individual Financial Management, 1(1), 80. https://doi.org/10.1016/1057-0810(91)90011-M

Issue

Section

Abstracts of Articles on Individual Financial Management