A constant maturity option (a caption on a constant maturity swap) which gives the holder the right to place a cap on a CMS swap rate. This cap is a series of options (caplets), similar to LIBOR-based cap structures. However, its mechanism is based on comparing the ten-year swap rate to the strike (cap level), rather than comparing LIBOR to the strike as is the case with standard or vanilla caps. This cap can also be viewed as a series of swaptions which have increasing maturities and their payoffs are multiplied by a specific annuity factor.

Cap payoff = max (ten year CMS rate – K, 0)

Like a regular cap, a constant maturity cap protects the holder from rises in a floating rate (long-term swap rate or CMS rate) above a predefined level (the strike). The holder (the buyer) of this cap usually pays an upfront premium (or in installments) to the seller (expressed as a percentage of the notional amount).