Year-on-year inflation-indexed swap explained

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

T _{i}

• • Party B pays Party A the fixed amount

N{\phi _{i}K}

• • Party A pays Party B the floating amount

N{\psi _{i}[ (I(T _{i)})/(I(T _{i-1} ))} - 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)

\phi _{i} is the fixed-leg year fractions for the interval [Ti−1, Ti]

\psi _{i} is the floating-leg year fractions for the interval [Ti−1, Ti]

T _{0} is the start date

T _{i} is the time of the flow i

T _{M} is the maturity date (end of the swap)

I(T _{0)} is the inflation at start date (time T _{0} )

I(T _{i)} is the inflation at time of the flow i (time T _{i} )

I(T _{M)} is the inflation at maturity date (time T _{M} )

See also

• Zero-Coupon Inflation-Indexed Swap (ZCIIS)