What is inflation asset swap?
An inflation swap is a transaction where one party transfers inflation risk to a counterparty in exchange for a fixed payment.
What is an accreting swap?
An accreting principal swap is a derivative contract in which two counterparties agree to exchange cash flows—usually a fixed rate for a variable rate, as with most other types of interest rate or cross-currency swap contracts.
Are inflation-linked bonds derivatives?
They are a natural development of the inflation-linked bond market. generation of derivatives did for interest-rates and credit risk. As flexible OTS products, inflation derivatives offer advantages over cash products in certain circumstances.
What is an LPI swap?
It stands for limited-price index swap. It is an inflation swap (a zero-coupon swap) in which a fixed amount is exchanged at a specified maturity for the limited-price index (LPI) return over the life of the swap. The LPI is a UK inflation index used to define typical payout structures of UK pension schemes.
What is ASW bond?
An asset swap (ASW) is a synthetic position that combines a fixed rate bond with a fixed-to-floating interest rate swap. 1 The bondholder effectively transforms the pay-off, where she pays the fixed rate and receives the floating rate consisting of LIBOR (or EURIBOR) plus the ASW spread.
Why are asset swaps used?
Basics of an Asset Swap Asset swaps can be used to overlay the fixed interest rates of bond coupons with floating rates. It is widely used by banks to convert their long-term fixed rate assets to a floating rate in order to match their short-term liabilities (depositor accounts).
What is forward swap?
A forward swap, also called a deferred or delayed-start swap, is an agreement between two parties to exchange cash flows or assets on a fixed date in the future, and which also commences at some future date (specified in the swap agreement).
What is a differential swap?
An interest rate swap in which a counterparty swaps floating payments referenced to an interest rate of one currency into floating payments referenced to an interest rate of another currency. The principal for both payments, however, is in one currency. Also known as cross index basis swap. …
Are inflation swaps interest rate derivatives?
An inflation swap is a derivative contract between two counterparties to transfer inflation risk by exchanging fixed cash flows. The mechanics involve one party paying fixed payments, while the other makes payments based on the floating rate on an inflation index.
How does inflation affect derivatives?
Inflation derivatives allow individuals to participate in price movements of an underlying market or index, in this case, a Consumer Price Index (CPI). While other products like TIPS also offer inflation protection, inflation derivatives, like zero-coupon swaps, are much more versatile and may be more cost-effective.
How does an RPI swap work?
A swap which involves an exchange of interest calculated by reference to the Retail Prices Index (RPI) and another reference rate (usually LIBOR). In essence, this swap is an inflation swap which allows parties to hedge the risk of inflation (i.e., inflation being lower or higher than expected).
What is LPI finance?
Loan Protection Insurance (LPI)
Why are accreting swaps useful for a company?
Accreting swaps are useful if cash flows grow over time. This way the swap matches the cash flow. The terms of an accreting swap are agreed to in advance by the two parties, including the schedule of how much and when the notional amount will increase.
How does an accreting principal swap differ from a vanilla swap?
However, in an accreting principal swap, the notional principal grows over time until the swap contract matures. Parties in a vanilla swap might exchange the payments of a fixed-rate investment, such as a Treasury bond, for the payments of variable rate investment, such as a mortgage, where the rate goes up and down.
How does an inflation swap work and how does it work?
How an Inflation Swap Works. One party to an inflation swap will receive a variable (floating) payment linked to an inflation rate and pay an amount based on a fixed rate of interest, while the other party will pay that inflation rate linked payment and receive the fixed interest rate payment.
When does an accreting principal swap expire?
The swap will expire on a date agreed to in advance, such as when the investments mature, say in five years. Over those five years, the notional amount will grow by $50,000 each year. The notional amount is not exchanged.