It stands for pay-as-you-go swap; an inflation swap where the two counterparties exchange an inflation rate against a fixed rate every year. This swap is usually used to hedge issues of index-linked bonds. Put it another way, one counterparty pays an index-linked coupon, which is a fixed rate leg plus the annual rate of change in the underlying index, and receives Euribor/ LIBOR, plus a specific spread, if any.

This swap is also referred to as a year-on-year inflation swap.