Inflation Insurance
DOI:
https://doi.org/10.1016/1057-0810(91)90011-MAbstract
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.)
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