An inflation-indexed swap that is combined with a cross currency swap. This swap entails the exchange of two different cash flows, each denominated in a different currency and indexed to inflation rate in that currency. For example, a cross-currency inflation-indexed swap may consist of two legs: one denominated in US dollar, and the other in Mexican peso (MXN), with payments being physically exchanged. The two principals are exchanged at inception and maturity, using an initial USD/MXN spot rate (or USD/UDI spot rate). The rates could be 6-month USD LIBOR and fixed UDI, with a count convention of ACT/360 on both legs.
UDI: The Unidad de Inversion (literally unit of investment) is an index of funds controlled by the Mexican government and used in the Mexican credit industry. It captures the accumulated consumer price inflation index denominated in peso (e.g. 1 UDI= 4.89 MXN as of 28 Jan 2013).
