An interest rate floor which provides, at specific adjustment dates, protection against decreasing interest rates for loans and mortgages. It limits the minimum amount of adjustable rate loans on a periodic basis. The floorlet rate resets at a pre-agreed spread to the reference rate for each period thought the floor’s life. For that reason, the holder of a variable strike floor doesn’t receive the absolute protection otherwise provided by normal floors.
For example, consider an adjustable rate loan with a reference rate of 7%, an initial floor of 1% and a variable strike floor of 1%. At the first adjustment date, this loan can adjust downward to 5% at most. At the second adjustment date, it can adjust 1% at least.
