Cross Currency Inflation Swap

A cross currency inflation swap is a zero coupon inflation rate swap which gives each counterparty access to a different foreign currency. That is, one counterparty makes payments in one currency; the other makes payments in a different currency.

The:

Inflation leg is set by reference to an inflation index rather than by reference to a short-term reference rate.

Each currency has a standard inflation index. Currently in SDX Interest Rates you can price a cross currency inflation swap for the following currencies—USD which is based on USCPI; EUR which can be based on any of the following indices: HICPxT, FRCPIxT, HICP, ITCPI, SPCPI, FRCPI; GBP which is based on UKRPI; AUD which is based on AUCPI; ILS which is based on CPI/ILS.

For more information on the inflation index conventions, see Understanding the Inflation Index Conventions .

The other leg is a vanilla fixed/floating leg in a different currency to the inflation leg.

Because there are two currencies involved, the payments may not only include interest rate payments (on the set payment periods in the relevant currency on the respective principal) but also (also) an exchange of principals. You can specify that principals should be exchanged at the start date, end date, both the start date and the end date or on neither date.

Advantages of a cross currency inflation swap

A cross currency inflation swap is typically used by a corporation who wants to issue inflation linked debt in one currency and wishes to then swap this into vanilla-linked debt in another currency.

Pricing a cross currency inflation swap

The system:

Needs to know which forward index interpolation method to use.

For more information, See "Selecting the Forward Index Interpolation Method for Inflation Instruments".

Needs to know to deal with seasonality.

For more information, See "Customizing the Seasonality Adjustment for Inflation Instruments".

Needs to know from when to calculate the seasonality.

For more information, see Defining Which Reference Index to Use to Calculate the Seasonality

The system uses inflation rates which are taken by lag definition, even if more recently published rates are available.

When you define the instrument’s tenor, the system automatically displays the default inflation lag for the selected index in the Inflation Lag field. However, you can then edit this value if required. This lets you instruct the system to price the instrument using a non-default inflation lag.