Inflationsswap

An inflation swap is a bilateral derivative that allows parties to exchange payments tied to inflation. In a standard contract, two counterparties agree on a notional amount and a term. One leg pays a fixed rate, while the other leg pays a rate linked to inflation, typically measured by an index such as the consumer price index (CPI) or a harmonised index (HICP). At each payment date, the inflation-linked leg yields a payment equal to the period’s inflation accrual, which can be structured as the cumulative change in the index over the term (zero-coupon style) or as periodic year-on-year inflation (YoY) realized in each sub-period. The fixed and inflation-linked cash flows are settled against each other.

Purpose and use: Inflation swaps are used to hedge inflation risk for liabilities or to gain exposure to inflation expectations without owning inflation-linked bonds. They allow investors to adjust real-interest-rate exposure or to speculate on future inflation trends. Markets are typically over-the-counter and governed by ISDA-style documentation, with collateral arrangements to manage counterparty risk.

Pricing and risks: The fixed rate is set so the contract has zero net present value at inception, based on expected inflation paths and discount factors. Valuation depends on forecasted inflation, the chosen index, and the term structure of interest rates. Key risks include counterparty credit risk, model risk, index mis-measurement or revisions, liquidity risk, and basis risk between different inflation measures.

Market and indices: Inflation swaps are traded in several currencies (for example USD, EUR, GBP) and reference indices such as CPI, CPI-U, CPI-W, or HICP. Typical maturities range from 2 to 30 years, with various variants including cross-currency or different inflation-index formulations.