An interest rate option whose payoff is determined either as a fixed interest payment for an in-the-money option, or nothing for an out-of-the-money option. This option gives the holder the right without the obligation to pay or receive a preset interest rate (called the strike) on a specific notional amount for a specific period of time, if the option ends up, at the end of that period, in the money. The option holder thereby has the right to lock in a future rate today.
It is also known as an interest rate digital option.
