Hey guys, does anyone know anything about Inflation Options? Are these actively traded? What is the liquidity compares to Inflation Swaps (EUR or USD) and to Swaptions (again, EUR or USD)?
In particular, I am asking these questions on the European inflation options market.
Thanks a lot for your help!
Hey ForTheDream, I swear if I had a silver banana for every lonely thread I posted too I'd be richer than @compbanker ...
Hope that helps.
Any insights?
lol...inflation liquidity....you could drive a truck thru those markets...they are as wide as they come....rip your eyes out and suck your brains dry. thats what inflation liquidity is like.
really? even tips?
yes, even TIPS
Understood, thank you!
You have to ask yourself. Where is the demand for inflation volatility coming from? Maybe in structured note issuance of CPI floaters there are low strike floors but other than that, maybe some hedge funds. Inflation is illiquid
Yep, agreed... Do you trade rates/rates vol?
rates structuring
example of what i mean by "wide spreads" in inflation products
5mm notional structured note, with a very simple structure. If total annual CPI greater than x%, note pays excess CPI above x% + 1yr libor, else note just pays 1yr libor. So, kind of like a TIPS or simple inflation linked bond...but with a boundary.
Back then the 1yr libor was around 1% but with QE, the market feared an inflation spike (that never came), hence paying an absurd fee for this note.
Trading desk took ~500k fee to sell that structured note...and i think they took another absurd fee to unwind it when it became clear that inflation would not spike and they didn't want the note anymore.
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