Effect of a Corridor (1) and its Premium on a Borrower's Interest Rate
(1) A combination of two caps, one purchased by a borrower at a set strike and the second sold by the borrower at a higher strike to, in effect, offset part of the premium of the first cap. The two cap structure limits interest costs unless rates rise through the strike on the upper cap. At that rate, the borrower's interest costs begin rising again. Also called Interest Rate Corridor. Compare with Floored Put (diagram). (2) A collar on a swap created with two swaptions-the structure and participation interval is determined by the strikes and types of the swaptions. (3) A digital knock-out option with two barriers bracketing the current level of a long-term interest rate. The payout is some multiple (typically 2 or more) of the premium if the rate stays between the barriers. If either barrier is breached, there is no payoff.
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