Using Inflation Derivatives

Inflation derivatives are a type of investment that are designed to protect investors against rising inflation rates. Here are the basics of the inflation derivative and how it works.

Inflation Derivative

This is a type of derivative that is going to give you some type of hedge against inflation. These are typically used as credit swaps between investors. The interest rate of the investment is going to be tied to a financial index such as the Consumer Price Index. If the Consumer Price Index increases, this type of investment is going to pay back a higher percentage of interest.

Compared to Bonds

Many investors have used inflation protected bonds to accomplish the same thing. The only problem with using inflation protected bonds is that they require a larger initial investment. They are also more complicated and they are not as investor friendly. Many people like to use inflation derivatives because you can invest a smaller amount of money and they are very liquid. With this type of investment, you are only going to have to provide them with a very small premium amount in order to get started investing. With most bonds, you are going to have to invest at least $1000.

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