Inflation Swap .December 29, 2020
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.
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 :
A 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).
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.