Collar hedge and Unobservable valuation inputs: Difference between pages

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<i>Risk management</i>.
''Fair value accounting. ''


1.
Unobservable valuation inputs are valuation inputs:


Two options used in combination as a hedge for an underlying exposure to a market price.
#For which market data are not available and
Collar hedges are more complex structures, compared with a simpler cap option or floor option.
#That are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability.


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 <i>sells</i> an option (in addition to <i>buying</i> 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 <i>zero cost</i> collar.)
==See also==
*[[Fair value]]
*[[IFRS 13]]
*[[Observable valuation inputs]]
*[[Valuation inputs]]


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.
[[Category:Accounting,_tax_and_regulation]]
 
The case where the hedger <i>pays</i> a net premium for the collar is known as a <i>positive cost</i> 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 <i>cylinders</i>, <i>corridors</i> or <i>range forwards</i>.
 
 
2.
 
The net hedged profile achieved by the use of the two options, in combination with the underlying exposure.
 
== See also ==
* [[Cap]]
* [[Floor]]
* [[Interest rate collar]]
* [[Negative cost collar]]
* [[Positive cost collar]]
* [[Zero cost]]

Revision as of 20:09, 27 June 2022

Fair value accounting.

Unobservable valuation inputs are valuation inputs:

  1. For which market data are not available and
  2. That are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability.


See also

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