FpML-IRD Inflation Indexed Asset Swaps

[Harry_MCALLISTER@xxxxxxxxxxxxxx]

I have a requirement to support inflation linked asset swaps in FpML.

I am particularly interested in how to specify the redemption payment at
maturity. The term sheet may contain a clause resembling the following:

   Additional flow at Termination Date:

   PartyA shall pay to PartyB value 15 August 2012

            Notional Amount x Max [0; ((Index Final/ Index Initial) – 1)]

   Index Initial:                     102.34567

   Index Final:                       The DRI Index level for the
                                        Termination Date

In principle this flow could be modelled as a final principal exchange
                                     (such that the exchanges net to the
                                     required value), given the ability to
                                     specify the payout formula on the
                                     inflation leg.

The Inflation swap model does allow a formula to be specified at the level
of the swapStream, however the documented purpose is "Formula to be used
for Zero Coupon Inflation Leg. The same ComplexType used for Equity Swaps
has been re-used for this."

Reusing the formula to specify the payout on a final principal exchange
feels like stretching the model beyond its intended use, particularly as
use of principal exchanges to model the redemption payment is somewhat
artificial.

Have other members of the group encountered this issue - if so, is there
any interest in developing a solution for incorporation in the standard?

Are there other deficiencies in the inflation swap model which should be
addressed by the group?


Best regards,
Harry
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