An equity swap that has a cap placed on its equity side. The cap can be purchased along with the equity swap in one package from an equity swap dealer or separately each from a different dealer. For example, suppose a company which pays an equity index performance against a fixed rate on a three-year, annual-payment equity swap. The company buys a cap on the equity leg that binds the floating rate liability to an upper limit of 14%. In periods where the equity total return exceeds 14%, the company receives any excess amounts.
Derivatives
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