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 Asian cap (which is an Asian option on a cap rate) is also known as an average cap or an average rate cap.
