An inflation-linked derivative where the inflation rate is either paid on an annual basis or with a single amount at the swap maturity date. In other words, it is a swap where, on each payment date, one counterparty pays the other the inflation rate observed over a prespecified period, in return for a fixed rate being paid by the latter to the former. The inflation rate in question is computed as the percentage return of a consumer goods index, like the CPI, over the specified period of time. The main inflation-indexed swaps traded in the market are: the year-on-year (YY) swap and the zero-coupon swap.
The inflation-linked swap is also known as an inflation swap or an inflation-indexed swap.
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