An interest rate swap in which a floor is placed under the floating rate leg to a predetermined level. The value of a floored swap corresponds to an option premium. Often the fixed rate of the swap is adjusted to account for the premium and to put the swap back to par. Individual investors usually use floored swaps, and similarly capped swaps, to reduce or limit interest rate payments while investment banks take advantage of them to reduce exposure.
January 21, 2025
