Collar (finance)

A collar (English collar, frame) referred to in the financial sector a trading strategy that are limited to the negative as well as positive effects of the change in the value of the underlying asset. Collars are finished with shares or interest rate indices as underlying.

Collar with stock options

Hedge a stock position in the portfolio over stock options. By purchasing a put option ( with a lower price limit), the shares against larger downward movements are hedged. The cost of buying the put option will be reduced by the simultaneous sale of a call option ( with an upper target value ), but then will not participate in the price appreciation of the stock above the upper target value addition.

Collar with interest rate options

An interest rate collar is generated by the purchase of interest rate caps and the sale of interest rate floors. Where

• Maturity and nominal as well as underlying of a cap and floor correspond.
• The exercise price of the cap is higher than the floors.
• The purchase of the cap protects the investor against rising interest rates.
• The sale of the floor allows the investor does not participate in rate cuts over the agreed underlying addition, however, generated premium income.

For example, an investor pays variable interest rates on its revolving credit. The interest rates are adjusted quarterly to the EURIBOR 3 months rate. In order to hedge against rising interest rates, the investor could sign a cap. To keep the cost of the hats, small, but a collar would offer, as this attracts a lower premium by itself. So in the example closes the investor a collar with a cap rate of 6 % ​​and a floor rate of 2%. Thus, it hedges against rising interest rates. He must never pay more than 6% interest through the collar. However, he is only involved due to interest rate cuts. Decreases the interest rate under 2 %, the investor is still limited by the Collar - still - have to pay 2% interest.