Interest rate collar
A typical borrower collar buys a cap and sells a floor. The sold floor premium helps pay for the cap, but the borrower gives up some benefit if rates fall below the floor. A zero net-premium collar can have no initial option premium overall while still creating contractual obligations and opportunity costs. Match the notional, dates and reference rate to the borrowing and include loan margins when assessing the all-in outcome. A depositor's collar uses the opposite protective structure. The labels alone do not establish a perfect hedge.
Worked example
A borrower buys protection above 6% and sells a floor at 3% on the same reference rate. It is protected against covered rises beyond 6%, but if the reference falls to 1%, the sold floor requires a payment that removes the benefit below 3%, before loan margin and other costs.
Common mistake
Describing a zero-premium collar as free protection with unlimited benefit from favourable rate movements.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |