Inflation Delta as Sensitivity to the Inflation Curve

Summary

Inflation delta measures how a derivative’s value changes when inflation rates move. In an inflation derivatives portfolio, it is commonly expressed as sensitivity to a one-basis-point shift in the zero-coupon inflation rate at a given maturity. This frames the risk along the inflation curve rather than as one aggregate exposure.

A second definition describes it as the present value sensitivity of cash flows to changes in the inflation curve. Portfolio managers can use this measure to assess inflation risk relative to liabilities. The discussion distinguishes this convention from ordinary bonds, whose inflation-related exposure is typically described through nominal interest rate risk. It gives definitions but no pricing formula, example calculation, or treatment of how the measure varies across instruments and curve shifts.

Key ideas

• Inflation delta measures derivative value sensitivity to changes in inflation rates.
• For inflation derivatives, it is often quoted per basis-point move in a maturity-specific zero-coupon inflation rate.
• The measure can describe present value sensitivity of cash flows to the inflation curve.
• Portfolio inflation risk may be assessed relative to liabilities.
• Regular bond exposure is commonly framed as nominal interest rate risk.

Tags

# What is the "inflation delta" of an option?


# What is the "inflation delta" of an option?












I'm preparing a report on the different Greeks used in risk measurement, and my boss mentioned the inflation delta within the first-order Greeks (and the Inflation Vega, but I guess that if I figure out the first, I will get the latter as well).

Does anybody know what is commonly referred to as "inflation delta" of a derivative?

## Answer by dm63 (score 1, accepted)

https://quant.stackexchange.com/a/27602

Typically one only thinks about inflation delta in the context of an inflation derivatives portfolio. Then it is the sensitivity to a 1bp change in the zero coupon inflation rate for each maturity.

As others have mentioned, regular bonds are sensitive to inflation. However we typically describe that risk as a risk to nominal interest rates, rather than explicitly a risk to inflation.

## Answer by user18663 (score 0)

https://quant.stackexchange.com/a/27589

Inflation delta is typically used in the field of fixed income and is defined as sensitivity of the the present value of cash flows to the changes in the inflation curve. In business it is used to measure the inflation risk in the portfolio relative to the liabilities.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.