Cap

1. An option which effectively establishes a maximum worst case hedged rate or price for a cash outflow or a liability, while allowing the holder of the cap to retain the potential benefit of more favourable lower market rates or prices. In the case of a commodity, the cap would be a call option over the commodity.
2. The hedged expense profile achieved by the combination of a cap option with the underlying exposure.
3. 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.

See also

• Call
• Capped FRN
• Caps
• Collar hedge
• Floor
• Interest rate cap
• Interest rate collar
• Notional amount
• CertICM