An interest rate cap that has its rates reset in arrears and likewise paid in arrears. However, in practice, a lag of two business days between the reset and the payment is commonly observed. In-arrears caps can provide investors with protection against interest rate increases suffered by arrears swaps. Furthermore, investors facing a market with flat rates and expecting rises of higher proportions than what is predicted by a corresponding yield curve may find In-arrears caps particularly instrumental. Like a standard interest rate cap (vanilla cap), which is made up of a series of caplets, an in-arrears cap can also be viewed as a bunch of in-arrears caplets.
November 16, 2023