On the Pricing of Ination-Indexed Caps

We consider the problem of pricing ination-linked caplets in a Black- Scholes-type framework as well as in the presence of stochastic volatility. By using results on the pricing of forward starting options in Heston's Model on stochastic volatility, we derive closed-form solutions for inations caps which aim to receive smile-consistent option prices. Additionally we price options on the ination de- velopment over a longer time horizon. In this paper we develop a new and more suitable formula for pricing ination-linked options under the assumption of sto-