Finance:Year-on-Year Inflation-Indexed Swap

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The Year-on-Year Inflation-Indexed Swap (YYIIS) is a standard derivative product over Inflation rate. The underlying is a single Consumer price index (CPI).

It is called Swap because each year there is a swap of a fixed amount against a floating amount. But in reality only a one way payment is made (fixed amount - floating amount).

Detailed flows

  • Each year, at time Ti
    • Party B pays Party A the fixed amount NϕiK
    • Party A pays Party B the floating amount Nψi[I(Ti)I(Ti1)1]

where:

  • K is the contract fixed rate
  • N the contract nominal value
  • M the number of years corresponding to the deal maturity
  • i the number of years (0 < i <= M)
  • ϕi is the fixed-leg year fractions for the interval [Ti−1, Ti]
  • ψi is the floating-leg year fractions for the interval [Ti−1, Ti]
  • T0 is the start date
  • Ti is the time of the flow i
  • TM is the maturity date (end of the swap)
  • I(T0) is the inflation at start date (time T0)
  • I(Ti) is the inflation at time of the flow i (time Ti)
  • I(TM) is the inflation at maturity date (time TM)

See also