A knock-in cap in which the knock-in barrier is typically set above the cap’s strike. The floating rate is based on a long-term swap rate (usually the CMS index), rather than a reference rate such as LIBOR. In this respect, each caplet gets knocked-in or activated for a respective payment period if the underlying floating rate (the CMS index) breaks out above the barrier on a relevant fixing (resetting) date. Otherwise, the caplet is not knocked-in, initiating no payment for the period in question.
Knock-in CMS caps can provide investors with protection against an upside movement in the CMS index above a certain level or barrier.
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