Questions Regarding an Inflation Swap File?

[fpmladmin]

Hello, I have a few questions regarding how to read some of the values in the below inflation swap file, (inflation_swap_ex05_zc.xml). – I am not sure how to determine the payment frequency for the party paying the inflation linked rate. Is it annually or only once at the termination date similar to the fixed rate. – No rate is set for the party paying fixedshould there be? – What is meant by initial value = 1? – Ditto for day count fraction = 1 over 1 Hope you can help, Thanks very much, Nancy

[fpmladmin]

Hi Nancy, My answers: I am not sure how to determine the payment frequency for the party paying the inflation linked rate. Is it annually or only once at the termination date similar to the fixed rate. I think you will pay annually 1 Y – No rate is set for the party paying fixedshould there be? Yes, initial value =1 means rate of 100% – What is meant by initial value = 1? Rate of 100% – Ditto for day count fraction = 1 over 1 1/1 means 1, look at Annex to the 2000 ISDA Definitions (June 2000 Version), Section 4.16. Day Count Fraction, paragraph (a). I am ccing Harry McAllister, who is the chair of the IRDWG. He can correct my answers if necessary. Best regards, Marc

[fpmladmin]

Marc, Nancy, That looks fine to me. To expand a little: Clearly payment frequency depends on the terms of the trade – there are two common flavours of inflation swap, year-on-year (pay annually) and zero-coupon (pay at maturity). In the latter case, payment frequency = calculation period frequency = term of trade. We could also specify payment frequency = 1T here, by analogy with zero-coupon & OIS swaps (so, periodMultiplier=1, period=T, where T signifies that the interval spans the Term of the trade). “initialValue” means the initial value in a sequence of schedule values (in this case, fixed rates) – the initialValue may be followed by an optional sequence of dated “step” values.. Here a single value applies throughout, so we only need to produce the initialValue. 1 means 100%, because rates are always represented as real numbers in FpML (so 0.05 signifies 5%). I guess the value here is so high relative to the other examples (fixedRateSchedule/initialValue= 0.01 = 1%) because it represents (an estimate of) the cumulative change in the underlying index level over the 30Y term of the trade. Best regards, Harry

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