Inflation swap

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.

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.

gollark: Is there an EMC value dump anywhere?
gollark: I decided to ask the esolangs server.
gollark: How can I implement at least AE2-level autocrafting, then? I really don't want to handcraft OC junk.
gollark: (though those can't be handcrafted, right?)
gollark: I think that at most it has resources made from themselves plus other stuff.

See also

References
  1. How Liquid Is the Inflation Swap Market? Michael J. Fleming and John Sporn, 2013


This article is issued from Wikipedia. The text is licensed under Creative Commons - Attribution - Sharealike. Additional terms may apply for the media files.