Cap

Subtype of CapFloor Type

Corresponds to the usual "Cap", i.e. a series of cash flows, where the effective rate R determining each cash flow amount, is defined as R = max(I-K,0), where I is the agreed reference index - typically Libor - and K some constant referred to as strike.
For example, a Libor-based Cap consisting of 3 cash flow periods with strike = 4% and Libor rate at each period being 3%, 4% and 5% respectively, would pay its holder amounts based on the effective rates 0%, 0% and 1% respectively.
This is equivalent to holding a series of call options on the underlying reference index.