A moving average floor is a floor which pays off the minimum of reference rate averages associated with several periods (window periods) within the lifetime of the contract. At maturity, the holder gets only one payment, being the lowest moving average (MA) over the entire life of the cap. The following example illustrates how a moving average floor functions:

Suppose today is 01 April 2015 and that a moving average floor has the following features:

Notional amount: $5 million.

Reference rate: 3-month LIBOR.

Strike rate: 5%

Contract date: 01 June 2015

Floor maturity: 1 year.

Day-count convention: Actual/360

Window period: 6 months.

3-month LIBOR rates over the floor maturity: 4.10%, 4.90%, 4.60%, and 5.30%.

The average rates for the window periods (moving averages) are:

First window average rate= (4.10% + 4.90%)/2 = 4.50%

Second window average rate= (4.90% + 4.60%)/ 2 = 4.75%

Third window average rate= (4.60% + 5.30%)/ 2 = 4.95%

Therefore, the floor payoff is:

Payoff_floor= notional amount × Max [0; strike rate% – lowest MA]

Payoff_floor=$5 million × Max [0; 5% – 4.50%] = $25,000.