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  • #7616

    Hi,
    I am trying to understand how to interpret the fixed leg in examples I have seen of Zero Coupon inflation swaps in FpML. Some examples have calculation frequency 1Y, and payment frequency much longer, say 25Y, and daycount 1/1. Other examples including the example on the FpML site have calculation frequency the same as the payment frequency and equal to the term of the deal (say 25Y). In neither case is there any thing on the InterestRateStream object that suggests the fixed amounts are of the form Notional*((1+fixedRate)^term-1). Is it an implicit rule that daycount 1/1 and payment frequency larger than 1Y means the fixed coupon will be the inflation style payoff rather than usual interest rate swap (Notional*AccrualLength*FixedRate). Are there any examples of inflation zero coupon swaps less than one year in length, and how might they differ from the regular leg of the swap.

    I am really focusing on the interpretation assuming one reads the interestratestream in isolation. In all examples I have seen there is a productType which gives a clue the fixed leg is part of an inflation swap, maybe that is meant to be the clue to recognise the fixed leg payoff?

    Gary

    #8460
    h_mcallister
    Spectator

    Hi Gary,

    To your question about productType : as a general principle it should not be necessary to refer to the (optional) productType to determine the applicable payoff calculation. Although FpML does not specify the calculation method explicitly in the message, this should always be inferrable from the product characteristics.

    In the case of zero-coupon fixed leg on an inflation swap, one widely adopted convention is to specify the payment period as a number of years equal to the term of the contract. Taken together with the calculation period (usually annual), this implies a zero-coupon calculation delivering a single payment at term; the numeric value of the paymentFrequency/periodMultiplier can be substituted directly for the “term” expression in the equation above.

    An alternative would be to express the payment frequency as “1T” (one term). This is arguably a clearer signal that a zero coupon arrangement exists (the message consumer does not have to verify that the payment frequency precisely spans the term of the contract), but obliges the consumer to derive the exponent term of the payoff calculation (i.e. calculate the number of calculation periods which comprise the payment term).

    Lastly, as the zero-coupon fixed payment is deterministic, the knownAmountSchedule could be used to express the payment amount, omitting the calculaton parameters altogether (this approach is commonly used for zero-coupon interest rate swaps).

    The current inflation swap samples should not be regarded as normative – it is likely that they did not receive the appropriate level of scrutiny prior to publication. This is unfortunate, as the purpose of the samples is to serve as an authoritative reference for implmentation. The FpML Interest Rate Working Group has been re-constitued for FpML 5-10, revision/correction of the Inflation samples is one of the first items in its book of work: please refer to the minutes of the recent meetings. The intention is to re-publish the inflation swap samples with FpML 5-10 – I think there is also a case for correcting the existing samples at earlier versions retrospectively.

    Apologies for the delayed response to your query – please let me know if you have further questions.

    Harry McAllister
    Chair, FpML IRD-WG

    • This reply was modified 8 years ago by h_mcallister.
    • This reply was modified 8 years ago by h_mcallister. Reason: typo
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