What is an example of a type of swap that limits potential interest rate exposure?

A rate-capped swap is a specific type of interest rate swap that includes a cap on the interest rate that one party will pay. This feature is designed to protect the party from rising interest rates beyond a predefined level. In essence, if interest rates increase above this cap, the party's payment obligations will not exceed the cap rate, thereby limiting their exposure to higher interest costs. This makes rate-capped swaps advantageous for entities looking to manage interest rate risk while still benefiting from lower rates when they are available.

By having this cap in place, participants can stabilize their cost of borrowing and better manage cash flows, as they will not be subject to the full volatility associated with floating interest rates. This feature effectively allows for a balance between benefiting from favorable rate movements while also providing a safeguard against adverse movements in interest rates.

In contrast, the other options do not provide the same level of protection against rising interest rates that a rate-capped swap does, making the rate cap a distinctive feature that serves to limit potential interest rate exposure effectively.