An interest rate cap whose existence or activation depends on a floating rate or index crossing a certain barrier or threshold level. Generally, trigger caps come in different types: knock-in cap, knock-out cap, one-time trigger cap, and sticky trigger cap. The trigger rate can be higher or lower than the cap rate, depending on an investor’s views on interest rate. Insofar as the existence of trigger caps is just a matter of probability, not surety, premiums on trigger caps usually exceed premiums on ordinary caps.

For example, an investor wants to hedge against interest rates climbing above 8%. He buys a two-year knock-out, sticky trigger cap on a floating reference index at 8%. The trigger will be set, for example, at 6.5%. In this case, we assume the investor contemplates that if rates could touch the trigger in the two year horizon, then it would be relatively unlikely that rates rebound to 8%. Of course, once the cap is knocked-out, the investor need reconsider his outlook, readjusting whereby his hedging strategy.

The trigger cap is also known as a barrier cap.