Finance:Year-on-Year Inflation-Indexed Swap

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 [math]\displaystyle{ T_i }[/math]
  • Party B pays Party A the fixed amount [math]\displaystyle{ N{\phi_i}K }[/math]
  • Party A pays Party B the floating amount [math]\displaystyle{ N{\psi_i}[\frac{I(T_i)}{I(T_{i-1})} - 1] }[/math]

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)
• [math]\displaystyle{ \phi_i }[/math] is the fixed-leg year fractions for the interval [Ti−1, Ti]
• [math]\displaystyle{ \psi_i }[/math] is the floating-leg year fractions for the interval [Ti−1, Ti]
• [math]\displaystyle{ T_0 }[/math] is the start date
• [math]\displaystyle{ T_i }[/math] is the time of the flow i
• [math]\displaystyle{ T_M }[/math] is the maturity date (end of the swap)
• [math]\displaystyle{ I(T_0) }[/math] is the inflation at start date (time [math]\displaystyle{ T_0 }[/math])
• [math]\displaystyle{ I(T_i) }[/math] is the inflation at time of the flow i (time [math]\displaystyle{ T_i }[/math])
• [math]\displaystyle{ I(T_M) }[/math] is the inflation at maturity date (time [math]\displaystyle{ T_M }[/math])

See also

• Zero-Coupon Inflation-Indexed Swap (ZCIIS)