Inflation Swap

An inflation swap is a contract where one party pays a floating rate based on an inflation index of a principal amount, while the other party pays a fixed-rate cash flow based on the principal amount. The principal amount just sits there and doesn’t really do anything or switch hands...it’s just the anchor point for calculating the on-top amount that’s actually being swapped.

Inflation swaps are a way investors can spend some money to reduce risk...per usual. If you’re in forex markets dealing with changing exchange rates and inflation, an inflation swap can be particularly useful in reducing inflation risk.