SDX Interest Rates Help > Supported Instruments > Knock-in CMS Floor

Knock-in CMS Floor

A knock-in CMS floor is similar to a Knock-in Floor, the only difference being that instead of the floating rate being based on a reference rate (i.e., the LIBOR), it is based on a long-term swap rate, i.e., the CMS index.

As in the knock-in floor, the knock-in barrier must be set lower than the strike. This means that each underlying floorlet is only activated (or knocked-in) for a payment period if the CMS is below the specified barrier. If the barrier is not hit in a payment period, the underlying floorlet is not activated and there is no payout for that period.

A knock-in CMS floor is useful when you need protection against a drop in the swap rate but can tolerate a drop down to a certain level. Because the underlying floor is only knocked-in when the swap rate is below the barrier, the premium is less than that of the equivalent CMS floor with the same strike.