5.3.3 Interpolation and Lag

The Derivative Contract Input screen has the interpolation capability. It has two values ‘None’ and ‘Linear’.

It takes time to process consumer price data and compute inflation numbers. Due to the processing time, price index is, typically, announced about two weeks after the month under consideration. This is the reason for indexation lags. The lag is currently 2 months in GBP, 3 months in USD and EUR.

In the case of USD Inflation Swap, Liner Interpolation is applied to compute the reference price index. The reference number for the first of any calendar month equals the index value of the calendar month three months earlier. P(01-May-19)=CPI(Feb-19), P(01-Jun-19)=CPI(Mar-19), and so on. The reference numbers for other dates can then be computed using Liner Interpolation of the reference numbers of the first days of the calendar months. In general, the daily reference number can be computed as follows:

Interpolation: Applied formula P_t = P_t1 + (d_t - 1) / D_t * (P_t2 - P_t1)

where,

• P_t1 is the price index lagged 3 months.
• P_t2 is the price index lagged 2 months.
• d_t is day of the reference date.
• D_t is number of days in the month containing the reference date.

Interpolated Index to be applied on schedules = Initial Index+ Slope* Period

Slope = Index Diff/Time Diff