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Cross-Currency Inflation Swaps and Inflation-Adjusted Currencies

Article Quant Q&A · Author: Jonas K
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Summary

The discussion outlines two ways a cross-currency inflation-linked swap can be structured. One approach exchanges inflation exposure tied to different national baskets, such as euro-area harmonized prices against UK consumer prices. This introduces relative basket risk, including differences in component weights, and can support a directional view on how the measures diverge. The response suggests that a dealer could hedge the resulting exposure, but provides no pricing or hedge mechanics.

A second example uses currencies with inflation-adjusted units, such as Mexico’s unit alongside its nominal peso, and describes swapping a fixed inflation-adjusted leg against a floating nominal rate. A cited market document reportedly classifies some adjusted-versus-nominal contracts as cross-currency swaps. The post also suggests combining local-currency inflation and nominal swaps with a further currency swap to construct broader exposure. These are brief practitioner observations rather than a complete contract specification; the discussion does not give cash-flow formulas, valuation methods, or evidence of market depth.

Key ideas

  • Cross-country inflation swaps can expose a trader to differences between national inflation baskets.
  • Differences in basket composition can drive relative inflation risk.
  • Some markets use inflation-adjusted currency units that can be swapped against nominal floating rates.
  • A sequence of local inflation and currency swaps can create broader cross-currency exposure.
  • The discussion offers examples but no detailed valuation or hedging framework.

Tags

Fixed incomeDerivatives pricingForex
Full text
# Cross-Currency Inflation-Linked Swap


# Cross-Currency Inflation-Linked Swap












I am trying to find any references to cross-currency inflation-linked swaps. Have anyone encountered them and can describe how they work and how they differ from standard year on year inflation swaps?

## Answer by rrg (score 1)

https://quant.stackexchange.com/a/40003

This is likely to be a marginal product that exposes the investor to the delta between reference baskets. For example, trading EMU HICP vs UK CPI, and the basket different may be a greater weighting on food etc.

The bank writing these instruments could easily hedge the risk. There is opportunity for sizeable bets.

Have not come across any media or other references, would be interested to see...

## Answer by Dimitri Vulis (score 0)

https://quant.stackexchange.com/a/46934

In some countries that have had high inflation in the past, they use 'inflation-adjusted' currencies alongside the nominal ones, e.g. in Mexico they have MXV along with MXN; in Colombia, COU along with COP; in Chile, CLF along with CLP. You can get broker quotes (e.g. from ICAP or maybe BGC) for swapping fixed MXV (i.e. MXN adjusted for inflation) v USD Libor.

I came across this old (2013) ICAP document, which suggests (pages 59ff) that they classify fixed inflation-adjusted v floating nominal (e.g. CLF - inflation adjusted fixed v CLP Camara - nominal floating) to be cross-currency swaps as well. But if it's not cross-currency enough for you, you can combine it, e.g. with CLP camara floating v CLP fixed, then CLP fixed v some other currency floating.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.