Interest-Rate and Inflation Swaps

Interest-rate and inflation swaps exchange cash flows tied to fixed rates, floating benchmarks, bond spreads, or inflation indexes. The contract may alter the economics of an asset or liability without refinancing, selling, or transferring the underlying position.

Start with Interest Rate Swap for fixed-versus-floating mechanics, payment calculations, valuation, and hedge mismatches. Use the broader Swaps, Rates, and Credit Derivatives section to compare these contracts with currency, credit, equity, and total-return swaps.

Choose the Right Article

The HJM model is a valuation framework, not a swap contract. A zero-coupon or forward-starting swap is a structural variation whose actual payment timing belongs in the confirmation rather than a separate generic label.

Example: A Debt Overlay

A company borrowing at a floating benchmark plus a credit spread can pay fixed and receive the matching floating benchmark in a swap. The floating legs may offset, leaving the loan spread plus the swap’s fixed rate.

That result is only approximate if notional schedules, benchmarks, reset dates, day-count conventions, floors, maturities, or prepayment behavior differ. The original loan remains outstanding, and the swap adds market value, collateral, counterparty, and closeout exposure.

What to Compare

• Fixed and floating leg direction, notional schedule, currency, effective date, and maturity.
• Exact benchmark, spread, compounding method, observation period, reset timing, and fallback language.
• Payment frequency, day-count convention, business-day calendar, netting, and settlement process.
• Current market value, duration, yield-curve sensitivity, basis risk, and stress loss.
• Clearing status, collateral, margin liquidity, counterparty, termination events, and closeout method.
• Match between the derivative and the loan, bond, asset, liability, or forecast transaction being hedged.

Common Mistakes

• Treating notional principal as cash exchanged or maximum loss.
• Assuming a swap cancels the underlying debt or guarantees a perfect hedge.
• Comparing quoted fixed rates without matching benchmark and cash-flow conventions.
• Ignoring collateral calls, early-termination value, and counterparty structure.
• Treating a pricing model as if it were a contract type.

This section is educational and does not provide personalized derivatives, investment, accounting, legal, tax, valuation, or hedging advice.

In this section

Choose a subsection first. Deeper term pages live inside each subsection, which keeps large topic hubs readable.