This topic describes how to use the inflation zero coupon swap templates in SWPM to price an inflation-linked zero coupon swap.
You can use shortcuts (e.g., SWPM –ILFXZC <Go> and SWPM –ILFLZC <Go>) to access the inflation-linked zero coupon swap templates from the command line, or you can click the Products toolbar button to choose a template from a menu.
• For more information about shortcuts, see Shortcuts.
• For information about how to load templates from the toolbar, see Choosing a Template.
SWPM's inflation zero coupon swap template is organized into tabs that allow you to set up and analyze the swap. You can structure and value your swap on the Main tab of the template, which is divided into four sections. You can input details of the swap in the inflation leg, fixed/floating leg, and curve/seasonality data sections, then evaluate the swap in the valuation section.
• Control Area: Allows you to navigate between tabs, analyze deals, set up scenarios, manage risk, generate trade tickets,
and configure your default settings. For more information, see Control Area.
• Inflation Leg: Allows you to configure your settings for the inflation-linked leg of the deal. You can enter, for example,
the market side, notional amount, country (i.e., the reference inflation market), currency, effective date, and maturity. The country you select determines the reference index used to calculate the inflation rate. You can backdate the swap to a past date or build a forward-starting swap (FSS). SWPM supports broken dates.
The Lag period refers to the difference between the CPI date and the inflation leg's effective or maturity date. Since most CPIs provide only monthly data, the Interpolation method determines the settlement date pattern if the deal starts or ends in the middle of one month. SWPM supports monthly302 and daily303 interpolation methods and defaults to the market standard for each curve. The Base Index value reflects the selected lag and interpolation method.
302 The settlement is always set on the 1st of the start and end month, which means CPI values are the direct monthly value
for these particular months. For example, if the lag period is three months, the coupon rate for one period is: (Monthly
CPI on 3 month before next Payment date / Monthly CPI on 3 month before previous payment date ‐1) x 100%.
303 The settlement dates are the original dates that can be in the middle of a month. CPI values are the daily weighted
The Leverage represents the magnitude of the reflection on CPI movements on the inflation leg coupons (a value of 1.000 means that a 2% increase in CPI in a year generates a 2% coupon on the inflation leg; a value of 2.000 means that a 2% increase in CPI in a year generates a 3% coupon on the inflation leg, etc.)
The Spread is a facultative fixed coupon you can add to the CPI appreciation within the inflation leg.
At the bottom of the section, the market value, accrued interest since the last leg cashflow date, premium, and DV01 for the inflation-linked leg appear.
For information about another field, position your cursor over it or see Definitions.
• Fixed/Floating Leg: Allows you to configure your settings for the fixed/floating leg of the deal. You can enter, for example,
the market side, notional amount (SWPM supports asymmetric notionals), currency, effective date, maturity, and fixed coupon or index used to calculate the floating rate for the deal. At the bottom of the section, the market value, accrued interest since the last leg cashflow date, premium, and DV01 for the fixed leg appear.
— For information about a field, position your cursor over it or see Definitions.
— For information about how to add or copy a leg, see Adding a Leg and Copying a Leg. — For information about scaling reset rates, see Scaling Reset Rates.
— For information about editing leg characteristics, such as date generation, amortization, and payoff information, see
Configuring Leg Details.
• Curve/Seasonality Data: Allows you to update the curves that SWPM uses to discount cashflows and project inflation
rates when calculating the Market Value of the swap. You can also enable/disable seasonality, which affects the value of all of the reset CPIs and index factors, and therefore all projected coupons. SWPM calculates the market value of the deal using the selected curve at the market close of the day indicated in the Curve Date field. The Valuation date is the date at which future cashflows are discounted.
Note: By default, SWPM prices swaps as of today, i.e., the default curve date is the current date. To price swaps as of a historical date, you must backdate both the Curve Date and Valuation fields. For example, to mark to market at quarter's end, you can enter the historical quarter-end date in both the Curve Date and Valuation fields. For more information, see
Backdating the Valuation.
— For information about a field, position your cursor over it or see Definitions.
— For information about how to update the curves that appear by default, see Setting a Source Curve.
— For information about how to visualize, customize, and apply shifts to the selected curve, see Analyzing Curves. — For information about how to display the real (i.e., inflation-adjusted) notional, index ratio, forecast CPI, and present
value for cashflows, see Cashflows and Resets.
— For information about customizing CPI projections, see Customizing CPI Projections.
• Valuation: Allows you to select the variable you want to solve for and evaluate the swap. You can calculate the market
value of the deal (the sum of the present values of the receive leg minus the sum of the present values of the pay leg), or you can customize the valuation by choosing a variable from the Calculate drop-down menu. You can solve for the following variables: Premium304, Leg1: Spread305, Leg1: Leverage306, and Leg2: Coupon307. For information about a field, position your cursor over it or see Definitions.
304 1.) In the Calculate drop-down menu, calculates the market value based on your inputs. The Market Value appears in the
Valuation section. 2.) The premium, calculated as (Market Value / Notional) x 100.00. 3.) In the Solver drop-down menu,
Note: In addition to the DV01 (interest rate sensitivity), SWPM calculates the inflation DV01, which measures the change in price of the swap for a parallel shift in the inflation curve.
You can further analyze zero coupon swaps by selecting another tab from the control area. Additionally, you can save your deal by selecting Actions > Save from the toolbar. Once you save the deal, you can access it from other Bloomberg functions or through Bloomberg's API by entering the deal number followed by the <CORP> key. For example, this allows you to download the cashflow schedule for an individual leg to Microsoft® Excel with Bloomberg's API.
• For information about the other tabs that appear on the template, see SWPM Tabs. • For more information about saving deals, see Saving Deals.
• For examples of using the template to price a plain vanilla swap, see Example: Solving for Spread and Example: Solving for
Price.
• For information about Bloomberg's API, see DAPI <Help>.