Am I right in saying that an inflation swap will be subject to two different types of risk. The funding risk (presumably LIBOR) and also inflation risk. The reason being that the swap value is dependent on changes in the underlying/forward inflation rate and also it is dependent on changes in LIBOR because it is being discounted at that rate. Clearly there is correlation between the underlying inflation rate and the interest rate; if this is not modelled explictly, is the associated risk described above being fundamentally misstated?All (sensible) thoughts welcome.Thxs,F.

I think you forget the asset swap.From an economical point of view( Fisher), I agree with you. We have the nominal rate, the expected inflation and the the real yield.From a market point of view, we need to take into account the asset swap between the IL Gilts and the swap, as we estimate the forward RPI from a bond curve. That is specialy true for the HICP, where we use a basket with bonds from different issuers to get as much pillar as we can to strip the curve.