A derivative whose underlying is the rate of inflation as measured by some inflation index such as consumer price index, retail price index, wholesale price index, etc. It is a natural development of the inflation-linked bond market. Inflation-linked derivatives allow market participants to have an exposure to inflation-linked cash flows, and are also an instrumental tool to enhance market liquidity in inflation-linked products and to enable investors to tailor cash flows in accordance with their requirements. Furthermore, inflation-linked exposures can be hedged using this type of derivatives.
Inflation-linked derivatives are also known as inflation-indexed derivatives or inflation derivatives.
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