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