CoIIar

Refers to the ceiling and floor of the price fluctuation of an underlying asset. A collar is usually set up
withoptions, swaps, or by other agreements. n corporate finance, the collar strategy of buying puts and
selling calls is often used to mitigate the risk of a concentrated position in (sometimes) restricted stock.
When the restricted owner can't sell the stock, but needs to diversify the risk, a collar transaction is one of
the few tools available. Many corporate executives who receive chunks of their compensation in restricted
stock need to employ this strategy to mitigate the diversification risk in their overall portfolio.

CoIIar
. A way to hedge against the potential of loss by buying an out-of-the-money put while writing an out-of-
the-money call. A collar is most beneficial when an investor holds a stock that has recently experienced
significant gains. f the stock falls, the investor can exercise the put, ensuring a profit. f it continues to
rise, the call places a cap on the profit.

2. On an exchange, a measure designed to prevent panic selling by stopping trading after a security or
anindex has fallen by a certain amount. For example, if the Dow Jones ndustrial Average falls in a
trading day, the New York Stock Exchange suspends trade for at least one hour. A collar is intended to
allow investors to determine whether a situation is really as bad as it looks. t is sometimes called a circuit
breaker. See also: Suspended trading.

Collar (Iinance)
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n finance a .oIIar is an option strategy that limits the range of possible positive or negative returns
on an underlying to a specific range.
A collar is created by an investor being:
Long the underlying
long a put option at strike price X (called the "floor")
Short a call option at strike price (X+a) (called the "cap")
These latter two are a long Risk reversal position. So:
Underlying - Risk_Reversal = Collar
The premium income from selling the call reduces the cost of purchasing the put. The amount saved
depends on the strike price of the two options. f the premium of the long call is exactly equal to the
cost of the put, the strategy is known as a "zero cost collar". [Strictly speaking the name should be
"zero premium collar" as the cost of holding the position can be potentially high if the price of the
underlying rises above the strike level of the call.]
At expiration the value (but not the profit) of the collar will be:
zero if the price of the underlying is below X
positive if the price of the underlying is between X and (X + a)
The maximum value occurs for any price of the underlying above X+a.

ExampIe
Consider an investor who owns one hundred shares of a stock with a current share price of $5. An
investor could construct a collar by buying one put with a strike price of $3 and selling one call with a
strike price of $7. The collar would ensure that the gain on the portfolio will be no higher than $2 and
the loss will be no worse than $2 (before deducting the net cost of the put option, i.e., the cost of the
put option less what is received for selling the call option).
There are three possible scenarios when the options expire:
f the stock price is above the $7 strike price on the call he wrote, the person who bought the
call from the investor will exercise the purchased call; the investor effectively sells the
shares at the $7 strike price. This would lock in a $2 profit for the investor. He only makes a
$2 profit (minus fees), no matter how high the share price goes.
f the stock price drops below the $3 strike price on the put then the investor may exercise
the put and the person who sold it is forced to buy the investor's shares at $3. The
investor loses $2 on the stock, but can only lose $2 (plus fees), no matter how low the price
of the stock goes.
f the stock price is between the two strike prices at the expiration date, both options expire
unexercised, and the investor is left with the shares whose value is that stock price
(x), plus the cash gained from selling the call option, minus the price paid to buy the put
option, minus fees.
One source of risk is counterparty risk. f the stock price expires below the $3 floor then the
counterparty may default on the put contract, thus creating the potential for losses up to the full value
of the stock (plus fees).

n finance, the term "collar" usually refers to a risk management strategy called a "protective collar"; however, the use
of collars for other situations is less publicized. With a little effort and information, traders can use the collar concept
to manage risk and, in some cases, increase returns. This article will compare protective and bullish collar strategies
in terms of how they can help investors manage risk and increase returns. (To learn the basics to collars, see on't
Forget Your Protective Collar.)

ow Prote.tive CoIIars Work
This strategy is often used to hedge against risk of loss on a long stock position or an entire equity portfolio via the
use of index options. t can also be used to hedge interest rate movement by both borrowers and lenders
by using caps and floors.

Protective collars are considered a bearish to neutral strategy. The loss in a protective collar is limited, as is the
upside. Should the collared position increase above the strike price of the short call, the investor will lose the upside
potential - or suffer an opportunity cost. (To learn more about these collar basics, see our 5tions Basics tutorial.)


Read more: http://www.investopedia.com/articles/optioninvestor//protective-collar-bullish-collar.asp#ixzzasvrNZiF

nterest rate cap and floor
From Wikipedia, the free encyclopedia
An interest rate .ap is a derivative in which the buyer receives payments at the end of each period in which
the interest rate exceeds the agreed strike price. An example of a cap would be an agreement to receive a
payment for each month the LBOR rate exceeds 2.5.
Similarly an interest rate fIoor is a derivative contract in which the buyer receives payments at the end of each
period in which the interest rate is below the agreed strike price.
Caps and floors can be used to hedge against interest rate fluctuations. For example a borrower who is paying
the LBOR rate on a loan can protect himself against a rise in rates by buying a cap at 2.5. f the interest rate
exceeds 2.5 in a given period the payment received from the derivative can be used to help make the interest
payment for that period, thus the interest payments are effectively "capped" at 2.5 from the borrowers point of
view.

orward Rate Agreement - RA

What Does Forward Rate Agreement - FRA Mean?
An over-the-counter contract between parties that determines the rate of interest, or the currency
exchange rate, to be paid or received on an obligation beginning at a future start date. The contract will
determine the rates to be used along with the termination date and notional value. On this type of
agreement, it is only the differential that is paid on the notional amount of the contract.

Also known as a "future rate agreement".


Read more: http://www.investopedia.com/terms/f/fra.asp#ixzzaswC9eny

orward Rate Agreement
An agreement between two parties to exchange two currencies or interest rates at a given rate at some
point in the future. A forward rate agreement mitigates foreign exchange risk or interest rate risk for the
parties. t is most useful when both parties have operations or some other interest in a country using a
given currency or investment vehicle with a floating interest rate. Forward rate agreements are over-the-
counter contracts and are also called future rate agreements.

Cap
An upper limit on the interest rate on a floating-rate note (FRN) or an adjustable-rate mortgage (ARM).
Also, an OTC derivatives contract consisting of a series of European interest rate call options; used to
protect an issuer of floating-rate debt from interest rate increases. Each individual call option within the
cap is called a caplet. Opposite of a floor.

cap
An upper limit (same as ceiling), or to set an upper limit. n finance, this is normally used with respect
to interest rates. n the bond market, for instance, an issuer may cap the yield on a floating rate note
(capped note). A bank may cap the interest rate charged on an adjustable rate mortgage. A cap is
also an interest rate derivative that pays money to its holder if the underlying interest rate goes
above an agreed strike level. Cap is also short for market capitalisation, the total market value of a
company's issued shares. Stocks can be referred to as small-cap, mid-cap or large-cap.