An interest rate swap in which one leg is a fixed rate referenced to the UDI index (or the Unidades de Inversion). This index is the Mexican inflation unit that is published daily and is based on the price changes in the Mexican economy. This fixed rate is exchanged for a second leg which can be either fixed or floating. The second leg can be based on U.S. dollar or Mexican peso (MXN). If its second leg (either fixed or floating) is based on U.S. dollar, the swap turns into a cross currency inflation-indexed swap in which the second leg is referenced to the MXN UDI index. If this leg is floating, the swap is known as a UDI/LIBOR swap. Payment calculations for this swap are always measured and denominated in US dollar.
If the second leg (either fixed or floating) is based on the MXN UDI index, while the first leg is linked to the MXN (either fixed or floating), the swap becomes a standard domestic inflation swap. If the first leg is floating, it is referenced to the TIIE (the local floating rate MXN rate) and the structure is known as an UDI/TIIE swap. Payment calculations for this swap are always denominated in Mexican peso. Typically, notionals are exchanged at the expiration date of the UDI Swap. The UDI swap is useful for hedgers, municipal treasurers and asset managers thanks to its effectiveness in covering exposure to the UDI market.
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