Annual Inflation Swap is a financial derivative contract in which two parties agree to exchange cash flows based on the difference between the realized annual inflation rate and a predetermined fixed rate. This swap is primarily used as a risk management tool to hedge against inflation. The party receiving fixed payments benefits if the actual inflation rate exceeds the fixed rate, while the counterparty receiving floating payments benefits if the actual inflation rate is lower than the fixed rate. The swap allows participants to mitigate the impact of inflation on their investments or liabilities by transferring the risk to another party.
An Annual Inflation Swap is a financial derivative contract that allows two parties to exchange cash flows based on the difference between an agreed-upon fixed interest rate and the realised inflation rate over a specified period. The purpose of this swap is to hedge against inflation risk, as one party may benefit if the inflation rate exceeds the fixed interest rate, while the other party may benefit if the inflation rate is lower than the fixed interest rate. This type of swap is commonly used by investors, corporations, and financial institutions to manage their exposure to inflation and protect against potential losses. The terms and conditions of an Annual Inflation Swap are typically outlined in a legally binding agreement between the two parties, which specifies the reference index for inflation, the notional amount, the fixed interest rate, and the payment frequency.
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This glossary post was last updated: 29th March 2024.
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