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?
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Options Vs Collars
9y ago#1It 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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