A volatility swap with a corridor on its underlying asset/ price/ rate, etc. Corridor volatility swaps accumulate the volatility arising while its underlying is in the corridor over a specific period or periods, up to its expiration date. The buyer (holder of the swap) pays less than what is paid for of an otherwise identical volatility swap.
This swap allows investors to take a bullish (bearish) position on an underlying rate subject to a predefined corridor. The investor may use such a swap to hedge a short volatility position that worsens as the underlying increases or decreases over time.
