# Inflation Swap .

December 29, 2020An **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.

## 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** :

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.

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