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Derivatives

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  • July 11, 2021
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Inflation Swap

An interest rate swap that pays out if inflation (as measured by percentage increase in a relevant inflation index, such as the CPI) exceeds a predetermined level (threshold) over a specific period of time. The payer of the fixed rate, for a succession of intervals, would receive the inflation rate, and pay a fixed rate on a fixed notional principal. For example, between periods (a) and (b), the inflation rate is: Iab = (Sb/Sa) -1, where Sb, Sa are the swap payment at the end of each corresponding period.

This swap is also called an inflation-indexed swap or inflation-linked swap.


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