Knowledge

Barrier Cap

A modified interest rate cap that only pays a return to the buyer when the underlying index, usually LIBOR, is above the defined barrier level. When above this level the barrier cap payout is the same as the payout on a traditional interest rate cap. The barrier feature is usually applied to each LIBOR period separately. A traditional interest rate cap can be considered as a barrier cap where the cap strike and cap barrier are set at the same level. A barrier cap with a maximum dollar payout is known as a bounded Barrier floor.