Inflation Swap .

December 29, 2020 By Swapnil Suryawanshi

An inflation swap is an agreement between two counterparties to swap fixed rate payments on a notional principal amount for floating rate payments linked to an inflation index, such as the consumer price index.[1]

An inflation swap is the linear form of an inflation derivative, and used to transfer inflation risk from one counterparty to another.

How Liquid Is the Inflation Swap Market? -Liberty Street Economics

Example :

An investor takes out a 5 year loan that is repaid at LIBOR+1%. He considers this rate as the sum of real LIBOR plus a credit spread (1%) plus a floating inflation component. He would like to pay real LIBOR, the credit spread, and a fixed rate. So he enters into an inflation swap agreement where for the next 5 years he is paying a fixed rate on his loan’s principal while receiving year-on-year inflation on the same amount.

What is an RPI swap :

swap which involves an exchange of interest calculated by reference to the Retail Prices Index (RPI) and another reference rate (usually LIBOR). … In essence, this swap is an inflation swap which allows parties to hedge the risk of inflation (i.e., inflation being lower or higher than expected).

Inflation Swaps: What the Data Shows |

What are different types of swaps :

Different Types of Swaps

  • Interest Rate Swaps.
  • Currency Swaps.
  • Commodity Swaps.
  • Credit Default Swaps.
  • Zero Coupon Swaps.
  • Total Return Swaps.
  • The Bottom Line.