Inflation derivatives (or inflation-indexed derivatives) refer to over-the-counter and exchange-traded derivatives that are used to transfer inflation risk from one counterparty to another. Typically, real rate swaps also come under this bracket, such as asset swaps of inflation indexed bonds.

Inflation swaps are the linear form of these derivatives. They can take a similar form to fixed versus floating interest rate swaps (which are the derivative form for fixed rate bonds), but use a real rate coupon versus floating, but also pay a redemption pickup at maturity (i.e., the derivative form of inflation indexed bonds).

One party pays the compounded fixed and the other the actual inflation rate for the term.

Options on inflation, including caps, floors and straddles, can also be traded. These are typically priced against YOY swaps, whilst the swaption is priced on the ZC curve.