Year-on-year inflation-indexed swap


A year-on-year inflation-indexed swap is a standard derivative product over inflation rate. The underlying is a single consumer price index.
It is called a swap because each year there is a swap of a fixed amount against a floating amount, although in practice only a one way payment is made.

Detailed flows

  • Each year, at time
  • * Party B pays Party A the fixed amount
  • * Party A pays Party B the floating amount
where:K is the contract fixed rateN the contract nominal valueM the number of years corresponding to the deal maturityi the number of years ' is the fixed-leg year fractions for the interval
  • ' is the floating-leg year fractions for the interval ' is the start date
  • ' is the time of the flow i' is the maturity date
  • ' is the inflation at start date ' is the inflation at time of the flow i
  • ' is the inflation at maturity date