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Massie(Sep/Dec15) – How to choose Collar

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Massie(Sep/Dec15) – How to choose Collar

  • This topic has 3 replies, 2 voices, and was last updated 4 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
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  • December 5, 2020 at 10:49 pm #597796
    siwela1
    Member
    • Topics: 24
    • Replies: 17
    • ☆

    Can my collar be any combination of my choice?

    Looking at Massie, I believe the solution chose the Call option with the highest net return, combined with the put option that fixes the highest “cap” for the investor….
    Was this intentional on the examiner’s part or can I choose any combination?

    December 6, 2020 at 10:28 am #597835
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54754
    • ☆☆☆☆☆

    Yes – it can be any combination in order to illustrate how a collar works. These days there are usually only two exercise prices available in the question and then of course there is only one collar possible 🙂

    December 6, 2020 at 12:33 pm #597870
    siwela1
    Member
    • Topics: 24
    • Replies: 17
    • ☆

    So to clarify, the “best” collar possible is the one that fixes the highest cap in the case of an investor?

    December 6, 2020 at 3:55 pm #597895
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54754
    • ☆☆☆☆☆

    No. Just as is the case with using options on their own, there is no ‘best’ choice because the premiums paid and received will be different with different exercise prices.

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