01 Jan 2001, Energy Risk glossary , Energy Risk
The buyer of a corridor purchases a cap with a lower strike while selling a second cap with a higher strike. The premium earned from the sale of the second cap reduces the total cost of the corridor. The buyer is protected from rates rising above the first cap’s strike, but exposed again if they rise past the second cap’s strike. This liability can be limited by selling a knock-out cap, rather than a conventional cap.
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