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Derivatives

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  • August 12, 2021
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Pay-As-You-Go Swap

An inflation swap where the two counterparties exchange an inflation rate against a fixed rate every year. This swap is usually used to hedge issues of index-linked bonds. Put it another way, one counterparty pays an index-linked coupon, which is a fixed rate leg plus the annual rate of change in the underlying index, and receives Euribor/ LIBOR, plus a specific spread, if any.

This swap is also referred to as a year-on-year inflation swap.


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