Inflation Swaps
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An inflation swap is a financial derivative used to hedge or speculate on changes in inflation rates. In this agreement, two parties exchange cash flows based on the difference between a fixed interest rate (agreed upon at the start) and the actual inflation rate over a specified period. Typically, one party pays a fixed rate, while the other pays a floating rate linked to an inflation index, such as the Consumer Price Index (CPI). Inflation swaps are commonly used by investors, corporations, and financial institutions to manage exposure to inflation risk, such as protecting the real value of investments or liabilities against unexpected changes in inflation.