The payoff of inflation linked cashflows involves the ratio of reference values and with . The following approximation is used:

where is an approximately linear function, is the cashflow payment date and is a forward measure conditional at time . This approximation ignores the convexity correction which is dependent on the underlying inflation model.


This pays a fixed coupon on an inflation indexed principal. Define the following:

  • the principal amount
  • the base reference date
  • the final reference date
  • the accrual start date
  • the accrual end date
  • the accrual daycount from to
  • the fixed yield
  • is the rate multiplier

The cashflow payoff is