From ACT Wiki
- 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.
- The hedged expense profile achieved by the combination of a cap option with the underlying exposure.
- 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.