Year-on-Year Inflation-Indexed Swap

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The Year-on-Year Inﬂation-Indexed Swap (YYIIS) ia a standard derivative product over Inflation rate. The underlying asset 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
- Party B pays Party A the ﬁxed amount $N{\phi_i}K$
- Party A pays Party B the ﬂoating amount $N{\psi_i}[\frac{I(T_i)}{I(T_{i-1})} - 1]$

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 $T_M$ )

Terms	Credit spread Debit spread Exercise Expiration Moneyness Open interest Pin risk Risk-free interest rate Strike price the Greeks Volatility

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Valuation	Binomial Black Black–Scholes model Finite difference Garman-Kohlhagen Margrabe's formula Put–call parity Simulation Real options valuation Trinomial Vanna–Volga pricing

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Year-on-Year Inflation-Indexed Swap

Detailed flows

See also