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Quantitative Finance · Begrippenlijst

Wat is Limited price indexation?

Definition 11.10 Rates, Credit, XVA and Risk · Hoofdstuk 11 — Inflation Derivatives

Limited price indexation (LPI) uprates an amount each year by the index’s annual change floored at ff and capped at cc, compounding the result: after NN years it has grown by ∏i=1N(1+min⁡(max⁡(Ii/Ii−1−1,f),c))\prod_{i=1}^N\bigl(1+\min(\max(I_i/I_{i-1}-1,f),c)\bigr). UK pension increases follow it by statute, with [0%,5%][0\%,5\%] for rights earned before 6 April 2005 and [0%,2.5%][0\%,2.5\%] after.

Distribution of the twenty-year growth of an uncapped index and of its [0\%,5\%] limited-price-indexed version, 40 000 simulated paths of the sterling model: the cap removes the right tail, the floor the rare deflations. Data: the chapter’s tutorial.
Figure 11.4. Distribution of the twenty-year growth of an uncapped index and of its [0%,5%][0\%,5\%] limited-price-indexed version, 40 000 simulated paths of the sterling model: the cap removes the right tail, the floor the rare deflations. Data: the chapter’s tutorial.
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