An interest rate cap which consists of a string of caplets. It is designed to hedge future floating rate payment, specifically against potential increases in interest obligations over a specific period of time. Auto caps provide investors with a hedge for the first pre-specified set of in-the-money caplets. Thereafter, the cap expires.
The limit makes the number of caplets associated with this cap smaller than the number of caplets in a normal cap (vanilla cap). The holder receives a payment equal to the payment of a normal cap, with the payment being limited only to the first specified number of caplets that fix in the money.
Auto caps are also known as limit caps.
