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Sir , in an answer by the examiner he states that the main disadvantage of a collar is that u cannot get full benefit of the price of the underlying asset as u have set a cap, but arent options caps themselves?
It is not options versus collars.
Collars are using options.If you are borrowing money then you buy a put option and this effectively sets a cap on the maximum interest rate.
If you also sell a call option (and therefore create a collar) then you are accepting a floor (a minimum interest rate) and the reason you might do this is because you would then be receiving a premium from selling the call option which could be set off against the premium we had to pay to buy the put option.I have uploaded an article explaining how collars work, in detail. You can find it linked from the main Paper P4 page.
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