A combination of two interest rate caps, literally: a long position on an interest rate cap and a short position on another. In other words, a borrower buys one cap at a specified exercise price and sells the other at a higher exercise price, so to offset part of the premium of the long cap (bought cap). 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.

An interest rate corridor is also referred to as a corridor, for short.