An Interest Rate Cap is (generally) an O.T.C. derivatives contract based on a series of European interest rate call options. It is used to protect an issuer of the floating-rate debt generated by interest rate increases. Each individual call option within the cap is called a caplet. In detail, a knock-in option under a trigger clause is an option contract in which the option holder receives an option conditional on the underlying rate breaching a certain trigger level (also called barrier level).
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