General Information

Collar (against falling interest rates)


To hedge investments against falling interest rates.

Brief Description

A collar is a combination of interest rate options. It involves buying an out-of-the-money (below the market interest rate) floor, and simultaneously selling a cap that is also out-of-the-money (above the market interest rate). The premium costs for the floor can be partially or completely financed using the premium income from the sale of the cap.
This strategy hedges the interest income within a specific band (between the two exercise prices). Collars are normally concluded for several years, with the interest rate being fixed several times during the course of the maturity period – usually every six months. At each fixing, the market interest rate is compared with the exercise price and any difference in interest rates is paid.

Profit Potential

None; a low-cost form of hedge


None; a low-cost form of hedge

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