A knock-in floor in which the knock-in barrier is typically set below the floor’s strike. The floating rate is based on a long-term swap rate (usually the CMS index), rather than a reference rate such as LIBOR. In this respect, each floorlet gets knocked-in or activated for a respective payment period if the underlying floating rate (the CMS index) breaks out below the barrier on a relevant fixing (resetting) date. Otherwise, the floorlet is not knocked-in, initiating no payment for the period in question.
Knock-in CMS floors can provide investors with protection against an downside movement in the CMS index below a certain level or barrier. Anyhow, a limited drop in the CMS rate can be tolerated.
