An UDI Swap (also called an UDI/LIBOR swap) is an interest rate swap where one of the legs is based on a fixed rate set by reference to the UDI index. The UDI (or the Unidades de Inversion) is the Mexican inflation unit; published daily by the Central Bank, it is based on the price changes in the Mexican economy.
In effect, an UDI swap is a unique type of Cross Currency Swap in which one leg is linked to a virtual Mexican inflation-linked currency.
The second leg (which can be either fixed or floating) can be based on either the:
USD, making it a type of cross currency inflation swap. Specifically, it is an UDI/LIBOR swap.
Mexican Peso (MXN), making it a standard domestic inflation swap. Specifically, it is an UDI/TIIE swap, where the UDI leg is based on the MXN UDI index and the second leg is based on the MXN (either fixed or floating). If the second leg is floating, it is based on the TIIE, the local floating rate MXN rate.
In an UDI swap, there is typically an exchange of notionals at the end of the UDI Swap.
Pricing an UDI Swap in SDX Interest Rates
Pricing an UDI swap is similar to pricing a vanilla swap with the following exceptions:
When the second leg is based on the:
USD:
The results are displayed in USD.
The DV01 result is displayed in USD and MXN.
The PV change (USD) for spot MXN/USD up 1% result is displayed.
MXN, the results are displayed in MXN. However, you can then toggle the display of the swap NPV between MXN and USD.
After entering the tenor, the UDI index rates at the start of the swap and on the trade date are shown.
You can then edit both these rates. However, note that:
In line with market convention, the UDI index rate for a future start date is automatically set to the UDI index rate on the trade date. You can then edit this rate if necessary.
You can only edit the rate displayed for the trade date if the trade date is not in the future.
The fixed rate displayed by the system is initially calculated to give a zero NPV.
Notionals are exchanged on the end date.
In the Swap Cash Flow Dates window for the UDI leg, the notional amount is displayed in UDI/UF units (and not in the currency of the second leg).
The Start UDI field is linked to the Notional fields for both legs. Accordingly, when you first define the notional for one of the legs, by default the system automatically calculates the notional for the other leg using both the defined notional value and the index rate displayed in the Start UDI field (as well as taking into account the relevant spot rate—if the two legs are based on different currencies).
If you then edit either of the notionals, the system, the system accepts your change without changing the other notional—instead it automatically recalculates the index rate, to take into account both the notional values.
Advantages of an UDI Swap
UDI swaps are useful from a hedging perspective for both municipal treasurers and asset managers because they cover exposure to the UDI market.