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Interest rate corridor
       
 
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Interest rate corridor

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Interest rate corridor
An Interest rate corridor is composed of a Long Interest rate Cap Position and a Short Interest rate Cap Position. The buyer of the corridor purchases a Cap with a lower strike while selling a second Cap with a higher strike. The Premium earned on the second Cap then reduces the cost of the structure as a whole. The buyer of the corridor is protected from rates rising above the first Cap’s strike, but exposed if they rise past the second Cap’s strike. It is possible to Limit this liability by selling a Knock-out Cap rather than a conventional Cap. The structure is then known as a Knock-out Interest rate corridor.
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