An UF Swap is an interest rate swap where one of the legs is based on a fixed rate set by reference to an inflation-linked currency known as UF.
The UF (or the Unidad de Fomento) is a unit of account that is based on the daily published changes in Chilean inflation and the USD/CLP (Chilean Peso) exchange rate. This fixed rate is exchanged for a leg which can be either fixed or floating, but is always based on the USD. In addition, there is typically an exchange of notionals at the end of the UF Swap.
In effect, an UF swap is a unique type of Cross Currency Swap in which one leg is linked to a virtual Chilean inflation-linked currency.
Advantages of an UF Swap
UF swaps are useful from a hedging perspective for both municipal treasurers and asset managers because they cover exposure to the UF market.
Pricing an UF Swap in SDX Interest Rates
Pricing an UF swap is similar to pricing a vanilla swap with the following exceptions:
The fixed rate displayed by the system is initially calculated to give a zero NPV.
The results are always displayed in USD, except for DV01 which is also displayed in CLP.
After entering the tenor, the UF 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 UF index rate for a future start date is automatically set to the UF 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.
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 UF 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 UF 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.