5.3.1 Zero-coupon Swap (ZCIS)

Zero coupon is enabled through the Derivative Contract Input screen.

For Zero coupon Inflation Swap, the system uses the formula and will generate the payment schedules, using Inflation index. The system to use the formula for the floating leg.

N * [ P(T_M) / P_0 - 1 ]

where, P_0 and P(T_M) are the initial price index and the final price index respectively.

The compounding formula for the Fixed Leg is:

Inflation linked coupon formula = N*((RPIt/RPI0)-1)*(Days/Year)/100

where,
  • N=Notional Amount.
  • RPIt= Reference Rate at the time of payment.
  • RPi0= Reference base Rate at the time of Deal booking.

Fixed Rate Formula = N*((1+r)^n-1)

where,
  • N=Notional Amount.
  • n=number of period.
  • r= Interest Rate.

Below is the example for Zero Coupon Swaps:

Table 5-29 Inflation Index defined

UK-Non-revised Retail Price Index (UKRPI) GBP

2015 MAR

257.1

2015 APR

258.0

2015 MAY

258.5

2015 JUN

258.9

2015 JUL

258.6

2019 MAR

285.1

2019 APR

288.2

2019 MAY

289.2

2019 JUN

289.6

2019 JUL

289.5

Table 5-30 Zero Coupon swap contract details

Deal Details Values

Buy or Sell

Buy

Trade Date

25-May-15

Tenor (T)

4 Years

Value Date

1-Jun-15

Maturity Date

1-Jun-19

Notional Amount

100,000

Table 5-31 In and Out Leg Details

Deal Details 1 Details 2

NA

In Leg (Receive)

Out Leg (Pay)

Currency

GBP

GBP

Notional Amount (P)

100,000

100,000

Rate Type

Indexed

Fixed

Rate

-

2.50%

Rate Code

UKRPI

-

Tenor Code

1M

-

Interpolation Method

-

-

Interest Computation

Simple

Compound

Compounding Frequency (n)

-

Yearly

Table 5-32 Zero Coupon schedules for In Leg

Deal Details Values

Period Start (TS)

1-Jun-15

Period End (TE)

1-Jun-19

No. of Days (D) = TE-TS

1440

Receive Principal (P)

100,000

Index Value (IT)

285.1

Receive Interest (RI)

10,890.70

Table 5-33 Zero Coupon schedules for Out Leg

Deal Details Values

Period Start (TS)

1-Jun-15

Period End (TE)

1-Jun-19

No. of Days (D) = TE-TS

1440

Pay Principal (P)

100,000

Rate (R)

2.50%

Pay Interest (PI)

10,381.29

Net Cashflow (RI-PI)

509.41

Table 5-34 Inflation swap contract details

Deal Details Values

Buy or Sell

Sell

Trade Date

15-May-15

Tenor (T)

4 Years

Value Date

18-May-15

Maturity Date

18-May-20

Notional Amount

100,000

Table 5-35 Inflation Swap Example

Deal Details Values Values

-

In Leg (Receive)

Out Leg (Pay)

Currency

USD

USD

Notional Amount (P)

100,000

100,000

Rate Type

Fixed

Indexed

Rate

1.73%

-

Rate Code

-

CPURNSA

Tenor Code

-

1M

Interpolation Method

-

Linear

Interest Computation

Compound

Simple

Compounding Frequency (n)

Yearly

-

Table 5-36 Inflation Swap for In-leg

Deal Details Values

Period Start (TS)

18-May-15

Period End (TE)

18-May-16

No. of Days (D) = TE-TS

366

Receive Principal (P)

100,000

Index Value (IT)

1.73%

Receive Interest (RI)

1,734.78

Table 5-37 Inflation Swap for Out-leg

Deal Details Values

Period Start (TS)

18-May-15

Period End (TE)

18-May-16

No. of Days (D) = TE-TS

366

Pay Principal (P)

100,000

Index Value (IT)

238.772

Pay Interest (PI)

1,007.13

Net Cashflow (RI-PI)

727.65