Zero Coupon Inflation Swap

AAA

DEFINITION of 'Zero Coupon Inflation Swap'

An exchange of cash flows that allows investors to reduce or increase their exposure to the risk of a decline in the purchasing power of money. In a zero coupon inflation swap, which is a basic type of inflation derivative, an income stream that is tied to the rate of inflation is exchanged for an income stream with a fixed interest rate. However, instead of actually exchanging payments periodically, both income streams are paid as one lump-sum payment when the swap reaches maturity and the inflation level is known.

INVESTOPEDIA EXPLAINS 'Zero Coupon Inflation Swap'

The currency of the swap determines the price index that is used to calculate the rate of inflation. For example, a swap denominated in U.S. dollars would be based on the Consumer Price Index of the United States, while a swap denominated in British pounds would typically be based on Great Britain's Retail Price Index. Other financial instruments that can be used to hedge against inflation risk are real yield inflation swaps, price index inflation swaps, Treasury Inflation Protected Securities (TIPS), municipal and corporate inflation-linked securities, inflation-linked certificates of deposit and inflation-linked savings bonds.

RELATED TERMS
  1. Reverse Swap

    An exchange of cash flow streams that undoes the effects of an ...
  2. Debt For Bond Swap

    A debt swap involving the exchange of a new bond issue for similar ...
  3. Credit Default Swap - CDS

    A swap designed to transfer the credit exposure of fixed income ...
  4. Currency Swap

    A swap that involves the exchange of principal and interest in ...
  5. Forward Swap

    A swap agreement created through the synthesis of two swaps differing ...
  6. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
Related Articles
  1. Derivatives 101
    Fundamental Analysis

    Derivatives 101

  2. The Barnyard Basics Of Derivatives
    Investing Basics

    The Barnyard Basics Of Derivatives

  3. Credit Default Swaps: An Introduction
    Bonds & Fixed Income

    Credit Default Swaps: An Introduction

  4. Are Derivatives Safe For Retail Investors?
    Options & Futures

    Are Derivatives Safe For Retail Investors?

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center