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YearYearInflationSwap

YearYearInflationSwap instrument object

Description

Create and price a YearYearInflationSwap instrument object using this workflow:

  1. Use fininstrument to create a YearYearInflationSwap instrument object.

  2. Use ratecurve to specify an interest-rate model for the YearYearInflationSwap instrument.

  3. Use inflationcurve to specify an inflation curve model.

  4. Use finpricer to specify an Inflation pricing method.

  5. Use inflationCashflows to compute cash flows for the YearYearInflationSwap instrument.

For more information on this workflow, see Get Started with Workflows Using Object-Based Framework for Pricing Financial Instruments.

For more information on the available models and pricing methods for a YearYearInflationSwap instrument, see Choose Instruments, Models, and Pricers.

Creation

Description

example

YYInflationSwap = fininstrument(InstrumentType,'Maturity',maturity_date,'Notional',notional_value,'FixedInflationRate',inflation_rate) creates a YearYearInflationSwap object by specifying InstrumentType and sets the properties for the required name-value pair arguments Maturity, Notional, and FixedInflationRate.

example

YYInflationSwap = fininstrument(___,Name,Value) sets optional properties using additional name-value pairs in addition to the required arguments in the previous syntax. For example, YYInflationSwap = fininstrument("YearYearInflationSwap",'Maturity',Maturity,'FixedInflationRate',FixedInflationRate,'Notional',Notional,'Basis',4,'Lag',4) creates a YearYearInflationSwap option. You can specify multiple name-value pair arguments.

Input Arguments

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Instrument type, specified as a string with the value of "YearYearInflationSwap" or a character vector with the value of 'YearYearInflationSwap'.

Data Types: char | string

YearYearInflationSwap Name-Value Pair Arguments

Specify required and optional comma-separated pairs of Name,Value arguments. Name is the argument name and Value is the corresponding value. Name must appear inside quotes. You can specify several name and value pair arguments in any order as Name1,Value1,...,NameN,ValueN.

Example: YYInflationSwap = fininstrument("YearYearInflationSwap",'Maturity',Maturity,'FixedInflationRate',FixedInflationRate,'Notional',Notional,'Basis',4,'Lag',4)
Required YearYearInflationSwap Name-Value Pair Arguments

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Swap maturity date, specified as the comma-separated pair consisting of 'Maturity' and a scalar datetime, serial date number, date character vector, or date string.

If you use a date character vector or date string, the format must be recognizable by datetime because the Maturity property is stored as a datetime.

Data Types: char | double | string | datetime

Notional amount, specified as the comma-separated pair consisting of 'Notional' and a scalar numeric.

Data Types: double

Inflation rate, specified as the comma-separated pair consisting of 'FixedInflationRate' and a scalar decimal.

Data Types: double

Optional YearYearInflationSwap Name-Value Pair Arguments

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Day count basis for the fixed leg, specified as the comma-separated pair consisting of 'Basis' and a scalar integer for one of the following:

  • 0 — actual/actual

  • 1 — 30/360 (SIA)

  • 2 — actual/360

  • 3 — actual/365

  • 4 — 30/360 (PSA)

  • 5 — 30/360 (ISDA)

  • 6 — 30/360 (European)

  • 7 — actual/365 (Japanese)

  • 8 — actual/actual (ICMA)

  • 9 — actual/360 (ICMA)

  • 10 — actual/365 (ICMA)

  • 11 — 30/360E (ICMA)

  • 12 — actual/365 (ISDA)

  • 13 — BUS/252

For more information, see Basis.

Data Types: double

Indexation lag in months, specified as the comma-separated pair consisting of 'Lag' and a scalar numeric value.

Data Types: double

User-defined name for the instrument, specified as the comma-separated pair consisting of 'Name' and a scalar string or character vector.

Data Types: char | string

Properties

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Swap maturity date, returned as a datetime.

Data Types: datetime

Notional amount, returned as a scalar numeric.

Data Types: double

Inflation rate, returned as a scalar decimal.

Data Types: double

Day count basis for fixed leg, returned as a scalar numeric.

Data Types: double

Indexation lag in months, returned as a scalar numeric.

Data Types: double

User-defined name for the instrument, returned as a string.

Data Types: string

Object Functions

inflationCashflowsCompute cash flows for YearYearInflationSwap instrument

Examples

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This example shows the workflow to price a YearYearInflationSwap instrument when you use an inflationcurve object and an Inflation pricing method.

Create ratecurve Object

Create a ratecurve object using ratecurve.

Settle = datetime(2021,1,15);
Type = "zero";
ZeroTimes = [calmonths(6) calyears([1 2 3 4 5 7 10 20 30])]';
ZeroRates = [0.0052 0.0055 0.0061 0.0073 0.0094 0.0119 0.0168 0.0222 0.0293 0.0307]';
ZeroDates = Settle + ZeroTimes;
ZeroCurve = ratecurve('zero',Settle,ZeroDates,ZeroRates)
ZeroCurve = 
  ratecurve with properties:

                 Type: "zero"
          Compounding: -1
                Basis: 0
                Dates: [10x1 datetime]
                Rates: [10x1 double]
               Settle: 15-Jan-2021
         InterpMethod: "linear"
    ShortExtrapMethod: "next"
     LongExtrapMethod: "previous"

Create inflationcurve Object

Create an inflationcurve object using inflationcurve.

BaseDate = datetime(2020,10,1);
InflationTimes = [0 calyears([1 2 3 4 5 7 10 20 30])]';
InflationIndexValues = [100 102 103.5 105 106.8 108.2 111.3 120.1 130.4 150.2]';
InflationDates = BaseDate + InflationTimes;
myInflationCurve = inflationcurve(InflationDates,InflationIndexValues)
myInflationCurve = 
  inflationcurve with properties:

                    Basis: 0
                    Dates: [10x1 datetime]
     InflationIndexValues: [10x1 double]
    ForwardInflationRates: [9x1 double]
              Seasonality: [12x1 double]

Create YearYearInflationSwap Instrument Object

Use fininstrument to create a YearYearInflationSwap instrument object.

Maturity = datetime(2025,1,1);
FixedInflationRate = 0.015;
Notional = 2000;

YYInflationSwap = fininstrument("YearYearInflationSwap",'Maturity',Maturity,'FixedInflationRate',FixedInflationRate,'Notional',Notional,'Name',"YYInflationSwap_instrument")
YYInflationSwap = 
  YearYearInflationSwap with properties:

              Notional: 2000
    FixedInflationRate: 0.0150
                 Basis: 0
                   Lag: 3
              Maturity: 01-Jan-2025
                  Name: "YYInflationSwap_instrument"

Create Inflation Pricer Object

Use finpricer to create an Inflation pricer object and use the ratecurve object with the 'DiscountCurve' name-value pair argument and the inflationcurve object with the 'InflationCurve' name-value pair argument.

outPricer = finpricer("Inflation",'DiscountCurve',ZeroCurve,'InflationCurve',myInflationCurve)
outPricer = 
  Inflation with properties:

     DiscountCurve: [1x1 ratecurve]
    InflationCurve: [1x1 inflationcurve]

Price YearYearInflationSwap Instrument

Use price to compute the price and sensitivities for the YearYearInflationSwap instrument.

[Price,outPR] = price(outPricer,YYInflationSwap,"all")
Price = 12.5035
outPR = 
  priceresult with properties:

       Results: [1x1 table]
    PricerData: []

outPR.Results
ans=table
    Price 
    ______

    12.504

More About

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Algorithms

To price a year-on-year inflation-indexed swap (YYIIS), use an inflation curve and a nominal discount curve (model-free approach), where the cash flows are discounted using the nominal discount curve.

Cash flows for each year t={T1,...,Ti,...,TM}:FixedLeg=N×k×ΔtfixedInflationLeg=N×[I(Ti)I(Ti1)1]×Δtinflation

where

  • N is the reference notional of the swap.

  • k is the fixed inflation rate.

  • Δtfixed is the fixed leg fraction for the period.

  • Δtinflation is the inflation leg fraction for the period.

  • I(Ti) is the inflation index at the period end date with some lag (for example, three months).

  • I(Ti-1) is the inflation index at the start date with some lag (for example, three months).

References

[1] Brody, D. C., Crosby, J., and Li, H. "Convexity Adjustments in Inflation-Linked Derivatives." Risk Magazine. November 2008, pp. 124–129.

[2] Kerkhof, J. "Inflation Derivatives Explained: Markets, Products, and Pricing." Fixed Income Quantitative Research, Lehman Brothers, July 2005.

[3] Zhang, J. X. "Limited Price Indexation (LPI) Swap Valuation Ideas." Wilmott Magazine. no. 57, January 2012, pp. 58–69.

Introduced in R2021a