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Dear tutor,
In case of borrower, how do we select which strike prices to buy put and sell call for collar?
Can you also help to clarify setting up a collar if I’m depositing funds? Confused myself
It partly depends on how many exercise prices are available because if there are more than two you are able to suggest more than one collar.
A borrower will buy a put option and sell a call option. The strike price for the call option will have to be higher than that for the put option (in order to fix both a maximum and a minimum effective interest rate).
A depositor will buy a call option and sell a put option.
Have you both watched my free lecture on interest rate options and collars (and read our free lecture notes on collars)?
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