An interest rate cap (i.e., a contract on a maximum interest rate) whereby the seller pays the buyer, at periodic payment dates, the positive difference between the average market interest rate and the pre-determined strike price (the cap). On each settlement date, the strike rate on the cap is compared to the average index rate over a specific period. For example, a 9% cap on prime interest rate is set against the daily average of prime rates over the last quarter.

The average rate cap is also known as an average cap or an Asian cap.