An interest rate cap which requires no up front premium. This type of caps is instrumental in an environment of positively sloped yield curve. As such, the higher implied forward “floating rate” (like LIBOR) can be used to pay the cost of such a cap, rendering it “costless”. Unlike a standard cap, the zero cost cap doesn’t put a cap on a floating rate. However, the floating rate is reset in arrears.
The zero cost cap is also known as a zero premium cap.
