Activity: Talk or presentation › Science to science
In this study we propose an arbitrage pricing model for inflation linked derivative instruments. We
consider a multi-country setting where domestic and foreign nominal and real bonds are traded. Imposing
no-arbitrage assumption immediately yields the usual definition of real exchange rate (RER).
Moreover we get drift conditions, implied by the no-arbitrage, for real and nominal term structures of
the domestic and foreign economies. Assuming martingale property for the the real exchange rate we
find a relation between the real interest rates of the two economies. Introducing a forward contract into
our model results with the forward real exchange rate which can be written in terms of the price of the
domestic and foreign inflation indexed bonds.