The risk that arises from an underlying rate/price of a range-type derivative sliding outside the specified range. For example, the holder of a 5%-7% range note will lose coupon payments of, say, 8.5% when the floating rate (LIBOR) either exceeds 7% or drops below 5% over the life of the note. Investors choose to hold a range instrument when they have a strong view that rates will remain within a range, contrary to a particular forward rate curve.
However, corridor risk represents the possibility that the forward rate curve would turn out to be holding, driving rates against the predictions of investors in corridor-based instruments.
