Year-on-year inflation-indexed swap
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A 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 a swap because each year there is a swap of a fixed amount against a floating amount, although in practice only a one way payment is made (fixed amount – floating amount).
Detailed flows
- Each year, at time
- Party B pays Party A the fixed amount
- Party A pays Party B the floating amount
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)
- is the fixed-leg year fractions for the interval [Ti−1, Ti]
- is the floating-leg year fractions for the interval [Ti−1, Ti]
- is the start date
- is the time of the flow i
- is the maturity date (end of the swap)
- is the inflation at start date (time )
- is the inflation at time of the flow i (time )
- is the inflation at maturity date (time )