An interest rate cap that has a forward start date. In other words, the cap comes into effect at some future time, though it is currently held by the buyer (holder). This cap is usually used to hedge against interest rate upward fluctuations over the period from the cap’s effective date (start date) to cap’s expiration date. The cap agreement specifies the cap fixed rate at which the counterparties agree to start exchanging payments from the effective date (start date) onward. This rate is known as the forward cap fixed rate.

A forward cap is a strip of caplets each of which constitutes a call option on a forward rate (forward caplets).

Forward caps are also referred to as deferred start caps, forward start caps, and delayed start caps.