An interest rate floor that consists of a number of floorlets along with a prespecified limit. It is designed to hedge future floating rate receipts, specifically against potential decreases in interest receipts over a specific period of time. Limit floors provide investors with a hedge for the first pre-specified set of in-the-money floorlets. Thereafter, the floor expires.
The limit makes the number of floorlets associated with this floor smaller than the number of floorlets in a normal floor. The holder receives a payment equal to the payment of a floor cap, with the payment being limited only to the first specified number of floorlets that fix in the money.
Limit floors are also known as auto-floors.
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