Am I correct in saying that I understand the collar is a cash saving instrument but more than that it is more to mitigate losses than to produce gains. In fact you have exceeded your position by a little in order to make the saving such as Massie, 52 BPP. Where they expected the interest to rise or fall .5%, the collar was set at the 0.5 fall, in other words an acceptable loss??
Ask the Tutor ACCA AFM
Collar intention
7y ago#1Not really.
The whole purpose of using options in the first place is to limit the maximum interest payable (if we are borrowing money), but to still get the benefit if interest rates are lower. However there is the cost of the premium (which has to be paid even if the option is not exercised).
The whole purpose of creating a collar is to still be able to limit the maximum interest payable, but by accepting a minimum rate of interest we are able to reduce the net premium cost.
This topic is locked — no new replies.