Caps
1. A risk management arrangement whereby limits are placed on the positions that participants in an interbank funds transfer system can incur during the business day; they may be set by each individual participant or by the body governing the transfer system; they can be set in multilateral net, bilateral net or (less commonly) gross terms and can be either a credit cap or a debit cap; for example, bilateral net credit caps, set by an individual participant, will constitute a limit on the credit exposure which that participant will accept in relation to each other participant.
In contrast, sender net debit caps, which may for example be set by the governing body of the clearing system based on a particular formula, limit the aggregate value of transfers that an individual participant may send to all other participants over and above its incoming transfers. Sender net debit limits may be either collateralised or uncollateralised.
2. Option hedging structures which effectively establish a maximum hedged rate or price, while allowing the holder of the cap to retain the benefit of more favourable lower market rates.
