A combination of two interest rate caps, literally: a long position in an interest rate cap and a short position in another. The cost of purchasing a cap would be offset by the simultaneous sale another higher strike cap. In other words, a borrower buys one cap at a specified strike price and sells the other at a higher strike price, so to offset part or all of the premium of the purchased cap. The entire cost of the purchased cap can be offset by setting the notional amount on the cap sold equal to the purchase price. This structure helps limit interest charges unless rates rise above the exercise price on the higher price cap. Though the corridor buyer is protected from rates rising above the first cap’s exercise price, he is still exposed if rates rise past the second cap’s exercise. Selling a knock-out cap rather than a conventional cap could help overcome this liability. In this sense, the protecting structure is known as a knock-out interest rate corridor. A corridor is also referred to as an interest rate corridor.

In different contexts a corridor has different meanings. It can be defined as a collar on a swap formed with two swaptions. The structure and participation interval are determined by the two swaptions’ exercise prices and types. Additionally, a corridor could indicate a digital-like knock-out option with two barriers above and below the current level of a long-term interest rate. The payout could be defined in some multiple (typically two or three) of the premium if the rate remains between the barriers. If either barrier is breached, no payoff would be paid.