We note that the current position of the business cycle is highly favourable for inflation products. They have re-emerged as a major asset class and trading volumes have increased substantially. For a risk manager, this poses challenges in identifying and understanding the associated risks.

After providing definitions of inflation and the CPI, the first talk will explore the relationship between the nominal and real swap and bond markets. We will then discuss how the Australian Inflation Linked Bond is defined and used. Subsequently, inflation curves will be constructed using Inflation Bonds and Inflation Zero Coupon Swaps. The four standard inflation products used in Australia will be described. Finally, the basic option pricing models in use for these types of products will be introduced.

The second talk will explore a number of the different risk types and some of the methodologies that may be employed to understand and manage these risks. Topics will centre upon managing market risk in a fractured market, possible credit spread anomalies and construction issues in managing potential credit risk exposure measurement.

David Garvin obtained a PhD in Engineering from Cambridge University, England. With roughly 15 years experience, he has worked in quant roles covering Interest Rates, FX and Commodity asset classes whilst at Morgan Grenfell and Deutsche Bank in London and Commonwealth Bank of Australia in Sydney. He has also spent time in structured product and electronic trading roles. He currently heads the Quantitative Analysis Group within Global Markets at the Commonwealth Bank of Australia.

Paper: David Garvin, Inflation modelling in the Australian Market

Steve McCarthy is a finance professional who has worked in the banking industry for over 25 years. His previous lives have covered a wide range of roles including strategy consulting, management consulting, retail branch configuration as well being a quantitative trader, dabbling in technical trading and expert system techniques, and running a front office quantitative support area. He is currently the global head of the traded market model validation group within the Group Market Risk division of the National Australia Bank. This is a role spanning the Melbourne, Sydney, London and Wellington trading rooms.

Paper: Steve McCarthy, An introduction to the traded Inflation Market - A Risk Manager's Perspective