At London Financial Studies
we focus exclusively on capital markets
Our programs offer practical learning to
professionals from all over the world
Public courses at delivered in London
New York and Singapore
Our teachers are leading experts in
their fields with a wealth of practical knowledge
they are skilled communicators who can
get the message across quickly and effectively
Dr. David Cox
has an international reputation as a
teacher in the financial markets
His wide practical experience
includes front office roles in Bank of
America, London Business School 
and over 10 years of teaching at Goldman Sachs with LFS
He founded London Financial Studies in 1997
and specializes in inflation
quantitative techniques
risk management and derivatives
Capital markets have paid attention to inflation 
in various places over many years
In United Kingdom we've had an
index-linked bond market since 1981
other countries have issued
index-linked bonds more recently 
for example France in 1998 and the US 1997
The market for index-linked products
has grown enormously in the 2000's
where the derivatives
market started up and since about
2003 we've had a very
active derivatives market in a range
of products - swaps being the most
liquid - and more recently since
about 2007 we had inflation
options which are traded fairly
liquidly as well now.
Inflation's become a great deal
of interest recently in the
markets because of course we have two factors
which are very much operating in opposing directions
If you think about the credit crunch
that's of course an enormously deflationary event in the markets
and in response to that governments have an
ultra loose monetary policy.
Interest rates have come down to practicaly zero
in a lot of economies
and we have negative interest
rates in some places, and we have
quantitative easing
The consequence of that, of course, is that you
have a potential for deflation from
the initial driving force of the credit
crunch, and a potential for a lot of
inflation from the policies that have been
put in place to counter the impact of the credit crunch.
The question is to know which one of those two forces is
going to be in the ascendant and that's
where our index-linked bonds and perhaps more
importantly our devivatives come into play
giving fund managers, banks, pension funds
the ability to remove the risks
Inflation is determined by the
overall activity in any given economy
it's not something that just is subject to the fluctuations 
of market supply and demand.
So, when you are trading in inflation-linked
products as opposed to an interest rate product
then you are trading something with
reference to an economic variable
which is not affected by the
actual process of trading that rate.
So Inflation is a little bit different in
that respect to other assets
The use of inflation products - be they bonds or derivatives -
is of course to transfer risk from one party - the group
that is long inflation, for example
a government can issue index-linked bonds
allowing the people who are very short
inflation, the people who suffer from inflation
to buy those bonds and thereby hedge their
inflation risk.
Derivatives of course provide a much
wider range of techniques and solutions
to different parties' inflation exposures
One other example of the use of
inflation derivatives in the recent past
is being by hedge funds
who've been able to
buy index-linked bonds which historically
have traded quite cheap in relation to
the rest of the market in relation to
nominal bonds
and by buying an index-linked bond and doing an asset
swap
and then doing the reverse transaction with a nominal bond
the hedge fund has actually being able to pick up 
quite a good return from that structure
The starting point is your
inflation curve. Once you've got that
then you can use that to value and re-value
 a range of inflation derivatives
So if we want to look at zero coupon and inflation swaps
we build up an inflation curve based on
the swaps market and we can compare
that with the inflation curve that we get
from
index-linked bonds and the difference
between the two, which actually can be
quite significant and has been for
sometime in the United States,
gives rise to possible strategies
that we can put in place
In the interest rate world we can easily
derive a forward interest rate from
zero coupon rates
in the inflation world that's not
quite so easy because of course
inflation is only known
at the end of a given time period
it's not known about at the beginning
of that time period, which means when
you try and derive forward inflation from
zero coupon inflation
we have to introduce an adjustment
which is derived from the volatility of inflation
and actually also the volatility of interest rates
So if we look at derivatives we tend to build
an inflation curve which is derived from
derivative products taking into
account seasonality, and then use that to
re-value and manage the risk of our
existing positions
When we want to think about options on inflation
then of course we need to look at our
basic inflation curve and think about
the impact of volatility in inflation on
the price on inflation options
and there are number of different
styles or varieties of inflation options that
started to become more and more liquid in the market
The LFS inflation course
shows you how to use Derivatives and 
index-linked bonds to hedge, trade and
manage risk in today's market
Exercises and spreadsheets help you apply
what you have learned as your career progresses
In the LFS program we look at a
range of things. We start off by
building up an inflation curve from
index-linked bonds
so we take index-linked bonds and we produce
an inflation curve where we have
zero coupon inflation which is inflation
from a particular point in time to
a specific point in time in the future,
rather than some sort of measure of break-even
inflation involving yelds.
This course is a much more precise
measure of inflation that is traded in the
markets and is an essential part really,
of doing anything either in index-linked bonds
or with inflation derivatives
We then going to have a look at
the swaps market and of course
consider one of the big features of
the inflation market which we
don't have in the market for
interest rates products which is the
seasonality in inflation
The issue with any programme which is
quite technical and quite in-depth and
which involves a lot of sort of nuts
and bolts "how to do it" type of information
is actually making the transition
between the classroom and what goes on in the office 
One of the things we do is have a look at
index-linked bonds on assets swaps.
So you can take an index-linked bond 
and you can compare it with a nominal
bond in terms of an asset swap. So you can
transform both bonds into
a nominal floting rate note and 
you compare the spread over or under Libor
that stems from doing an asset swap.
In order to do that
you got to look at the cash flows
and you have to work out what the
assets swaps levels are, and of course we do that
in one of the exercises
Then you have to think a little bit about
some of the practicalities around doing an
asset swap
in other words,
the credit risk that you take by asset swaping a high coupon
bond versus a low coupon bond
that aspect, which is not easy to capture in a spreadsheet,
has to be the thought about as well
We have a wide range of pension fund
managers, we have inflation traders,
we have middle-office people who
are in the process of analysing the models being used for
managing inflation risk
We've had a lot 
interest from central banks and government bodies
a range of people from a number of different institutions
local banks
banks in other parts of southeast
Asia and also fund managers as
well placed in that region
