An interest rate cap which provides, at specific adjustment dates, protection against increasing interest rates for loans and mortgages. It limits the maximum amount of adjustable rate loans on a periodic basis. The caplet rate resets at a pre-agreed spread to the reference rate for each period thought the cap’s life. For that reason, the holder of a variable strike cap doesn’t receive the absolute protection otherwise provided by normal caps.
For example, consider an adjustable rate loan with a reference rate of 5%, an initial cap of 1.5% and a variable strike cap of 1.5%. At the first adjustment date, this loan can adjust upward to 9% at most. At the second adjustment date, it can adjust 1.5% at least.
The variable strike cap is alternatively known as a periodic cap.
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