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Year-on-Year Inflation-Indexed Swap

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Title: Year-on-Year Inflation-Indexed Swap  
Author: World Heritage Encyclopedia
Language: English
Subject: Inflation swap, Zero-Coupon Inflation-Indexed Swap, Inflation, Amortising swap, Ratio spread
Collection: Derivatives (Finance), Inflation
Publisher: World Heritage Encyclopedia
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Year-on-Year Inflation-Indexed Swap

The Year-on-Year Inflation-Indexed Swap (YYIIS) ia a standard derivative product over Inflation rate. The underlying asset is a single Consumer price index (CPI).

It is called Swap because each year there is a swap of a fixed amount against a floating amount. But in reality only a one way payment is made (fixed amount - floating amount).

Detailed flows

  • Each year, at time T_i
    • Party B pays Party A the fixed amount N{\phi_i}K
    • Party A pays Party B the floating amount N{\psi_i}[\frac{I(T_i)}{I(T_{i-1})} - 1]

where:

  • K is the contract fixed rate
  • N the contract nominal value
  • M the number of years corresponding to the deal maturity
  • i the number of years (0 < i <= M)
  • \phi_i is the fixed-leg year fractions for the interval [Ti−1, Ti]
  • \psi_i is the floating-leg year fractions for the interval [Ti−1, Ti]
  • T_0 is the start date
  • T_i is the time of the flow i
  • T_M is the maturity date (end of the swap)
  • I(T_0) is the inflation at start date (time T_0)
  • I(T_i) is the inflation at time of the flow i (time T_i)
  • I(T_M) is the inflation at maturity date (time T_M)

See also

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