Inflation Derivatives

AAA

DEFINITION of 'Inflation Derivatives'

A subclass of derivative that is used by individuals to mitigate the effects of potentially large levels of inflation. The most common type of inflation derivatives are swaps, in which a counterparty's cash flows are linked to a price index and the other counterparty is linked to a conventional fixed or floating cash flow.

INVESTOPEDIA EXPLAINS 'Inflation Derivatives'

Many investors prefer inflation protection from derivatives because unlike inflation-indexed bonds, a significant amount of capital isn't required and it's more flexible. Inflation derivatives require the buyer to provide a small premium to the swap provider.

In most cases the Consumer Price Index (CPI) is used measure the differences in annual inflation.

RELATED TERMS
  1. Financial Analysis

    The process of evaluating businesses, projects, budgets and other ...
  2. Risk Analysis

    The study of the underlying uncertainty of a given course of ...
  3. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket ...
  4. Inflation

    The rate at which the general level of prices for goods and services ...
  5. Inflation-Protected Security - ...

    A type of fixed-income investment that guarantees a real rate ...
  6. Swap

    Traditionally, the exchange of one security for another to change ...
RELATED FAQS
  1. If a long call is owned on the record date of a stock, is the owner of the option ...

    The owner of a long call for a stock is entitled to a dividend only if the option is exercised prior to the ex-dividend date, ... Read Full Answer >>
  2. How are swap agreements financed?

    Since swap agreements involve the exchange of future cash flows and are initially set at zero, there is no real financing ... Read Full Answer >>
  3. What are the risks involved with swaps?

    The main risks associated with interest rate swaps, which are the most common type of swap, are interest rate risk and counterparty ... Read Full Answer >>
  4. How can an investor profit from the cyclical nature of the electronics sector?

    An investor can profit from the cyclical nature of the electronics sector in two ways. He can employ sector rotation, shifting ... Read Full Answer >>
  5. What does negative vega mean for credit spreads?

    Greek vega measures an option's sensitivity with respect to a change in the underlying asset's volatility. The vega of an ... Read Full Answer >>
  6. What options strategies are best suited for investing in the banking sector?

    The covered call option strategy allows investors to profit from the banking sector's stability and its track record for ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Are Derivatives A Disaster Waiting To Happen?

    They've contributed to some major market scandals, but these instruments aren't all bad.
  2. Economics

    What You Should Know About Inflation

    Find out how this figure relates to your investment portfolio.
  3. Forex

    10 Cities Leading Bitcoin Adoption

    An overview of the global cities leading the way in using the virtual currency Bitcoin.
  4. Forex

    Beware of these Five Bitcoin Scams

    We look at five bitcoin scams and how to protect yourself from fraud.
  5. Options & Futures

    How To Trade Orange Juice Options

    How do orange juice options work and which factors determine the orange juice valuations? Here's a sneak peak into the world of orange juice options.
  6. Investing

    Bitcoin Vs. Litecoin: What's The Difference?

    Litecoin is often referred to as "the silver to Bitcoin's gold." But what is Litecoin, and how does it compare to its more famous counterpart?
  7. Forex Education

    Why Governments Are Afraid Of Bitcoin

    Bitcoin is the first decentralized peer-to-peer payment network and cryptocurrency. Governments may fear Bitcoin because its value is determined by users and not central governments or banks. ...
  8. Fundamental Analysis

    Explaining the Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.
  9. Forex Education

    Countries Where Bitcoin Is Legal & Illegal

    Although bitcoin has been in existence for five years, most countries still do not have consistent laws regulating the cryptocurrency. However, a few countries have banned bitcoin altogether.
  10. Stock Analysis

    Fight Volatility and Inflation with Infrastructure

    As institutional investors flock to infrastructure assets there's good reason for retail investors to follow suit.

You May Also Like

Hot Definitions
  1. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  2. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  3. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  4. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  5. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
Trading Center