Year-On-Year_Inflation_Swap

The *Year-on-Year Inflation Swap* is a financial contract where, at the end of each accrual period, one party - the inflation receiver - pays a fixed rate coupon *Fxd* and receives a floating payment *Flt* linked to a specific inflation index from the other party - the inflation payer.

Formally:

*Fxd = NrΔt*

where *N* is the swap notional, *Δt* is the length of the accrual period expressed in number of years and

*Flt = N[m*YoY(Tend)+s]Δt*

where *YoY(t) = I(t-lag)/I(t-1Year-lag) - 1* represents the inflation rate at time *t* realized over the course of the preceding year with *Tend* being the end of the respective accrual period and *lag* being a contractually specified time lag.

The multiplier (also called gearing) *m* and spread *s* are constants with typical values 1 and 0 respectively.

Note *Δt* may not be the same in the above formulas if the fixed and floating legs have different daycount conventions.

Furthermore, for dates on which no directly applicable published inflation data exist, the referenced inflation index also depends on interpolation assumptions.