Difference between revisions of "Collar hedge"

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''Risk management''.   
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<i>Risk management</i>.   
A form of hedge using options.
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1.
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Two options used in combination as a hedge for an underlying exposure to a market price.
 
Collar hedges are more complex structures, compared with a simpler cap option or floor option.   
 
Collar hedges are more complex structures, compared with a simpler cap option or floor option.   
  
An advantage of collars is that they can reduce the net premium paid for the hedge.  They do this by adding a short option position to the simple cap or floor. In other words by the corporate hedger ''selling'' an option (in addition to ''buying'' the simple cap or floor option).
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An advantage of collars for hedging is that they reduce the net premium paid for the hedge.  They do this by adding a short option position to the long position in the simple cap or floor.  
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In other words the hedger <i>sells</i> an option (in addition to <i>buying</i> the simple cap or floor option).
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The premium received by the hedger reduces their net premium payable.  The net premium payable is often zero. (This arrangement is called a <i>zero cost</i> collar.)
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It is also possible - though less common - to construct a <i>negative cost</i> collar, the net premium being <i>receivable</i> by the hedger.
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The case where the hedger <i>pays</i> a net premium for the collar is known as a <i>positive cost</i> collar.
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The result of dealing in the combination of two options as a hedge is to ‘collar’ the all-in hedged expense or income achieved within a range which is acceptable to the hedger.
  
The premium received by the corporate reduces their net premium payable. The net premium payable is often zero. (This arrangement is called a ''zero cost'' collar.)
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Collars are also known as <i>cylinders</i>, <i>corridors</i> or <i>range forwards</i>.
  
It is also possible - though less common - to construct a ''negative cost'' collar, the net premium being ''receivable'' by the corporate.
 
  
The case where the corporate hedger ''pays'' a net premium for the collar is known as a ''positive cost'' collar.
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2.
  
In all cases, the net result and intention is to ‘collar’ the all-in hedged rate achieved within a range which is acceptable to the hedging corporate.
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The net hedged profile achieved by the use of the two options, in combination with the underlying exposure.
  
Collars are also known as ''cylinders'', ''corridors'' or ''range forwards''.
 
  
 
== See also ==
 
== See also ==
 
* [[Cap]]
 
* [[Cap]]
 
* [[Floor]]
 
* [[Floor]]
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* [[Interest rate collar]]
 
* [[Negative cost collar]]
 
* [[Negative cost collar]]
 
* [[Positive cost collar]]
 
* [[Positive cost collar]]
 
* [[Zero cost]]
 
* [[Zero cost]]
 
  
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[[Category:Manage_risks]]

Latest revision as of 14:36, 7 October 2020

Risk management.

1.

Two options used in combination as a hedge for an underlying exposure to a market price. Collar hedges are more complex structures, compared with a simpler cap option or floor option.

An advantage of collars for hedging is that they reduce the net premium paid for the hedge. They do this by adding a short option position to the long position in the simple cap or floor.

In other words the hedger sells an option (in addition to buying the simple cap or floor option).


The premium received by the hedger reduces their net premium payable. The net premium payable is often zero. (This arrangement is called a zero cost collar.)

It is also possible - though less common - to construct a negative cost collar, the net premium being receivable by the hedger.


The case where the hedger pays a net premium for the collar is known as a positive cost collar.

The result of dealing in the combination of two options as a hedge is to ‘collar’ the all-in hedged expense or income achieved within a range which is acceptable to the hedger.

Collars are also known as cylinders, corridors or range forwards.


2.

The net hedged profile achieved by the use of the two options, in combination with the underlying exposure.


See also