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Corridor
An instrument that combines two caps, whereby the buyer purchases a cap with a lower strike while writing a second cap with a higher strike, so that the premium earned on the short cap partially offsets for the premium paid on the long cap.
The buyer of the corridor is protected from rates rising above the first cap strike rate, but exposed if they rise past the second cap strike rate. This exposure can be limited by selling a knock-out cap instead of a conventional cap. The instrument would then be called a knock-out corridor or knock-out interest rate corridor.
Translations
Synonyms and variations
- Interest rate corridor
- Knock-out cap
- Knock-out corridor
- Knock-out interest rate corridor