Collar (finance)
A collar (engl. Collar , frame ) referred to in the financial industry , a trading strategy , of the both negative and positive effects of the change of the value of the underlying be limited. Collars are concluded with stocks or interest rate indices as an underlying.
Collar with stock options
Hedging an equity position in the portfolio using equity options . By buying a put option (with a lower price limit) the shares are protected against major downward movements. The expenses for the purchase of the put option are reduced by the simultaneous sale of a call option (with an upper target value), but then no participation is made in the price increases of the share above the upper target value.
Collar with interest rate options
An interest rate collar is generated by buying interest rate caps and selling interest rate floors. The following applies
- The term and nominal value as well as the base value of the cap and floor correspond.
- The exercise price of the cap is higher than that of the floor.
- Buying the cap protects the investor from rising interest rates.
- The sale of the floor does not allow the investor to participate in interest rate cuts beyond the agreed base value, but generates premium income.
For example, an investor pays variable interest on his current loan. The interest rates are adjusted quarterly to the EURIBOR 3 month rate. In order to hedge against rising interest rates, the investor could take out a cap. To keep the cost of the cap low, a collar would be an option, as this entails a lower premium. In the example, the investor concludes a collar with a cap rate of 6% and a floor rate of 2%. Thus, he protects himself against rising interest rates. With the collar, he never has to pay more than 6% interest. However, it only participates to a limited extent in interest rate cuts. If the interest rate falls below 2%, the investor will still have to pay 2% interest due to the collar - as before.
Zero-cost collar
With the zero cost collar (also: costless collar), the goal is to reduce the risk of the future development of a share , an interest rate, a right to sell or another economic good without additional costs .
The costless collar enables the owner of the asset to set the price range that he will receive for his goods in the future free of charge. In return, however, he refrains from participating in a major price increase.
The earlier the insurance should take effect, i. H. the smaller the maximum loss is defined by the insurance, the less the opportunities to participate in a further rise in the price of the asset.
example
A shareholder owns 1 share worth 100 euros. He suspects that the share price will rise slightly with greater fluctuations, and he wants to hedge against significant price losses without incurring costs today. To achieve this, he sells an option to buy for a period of time and a selected base price, in the example for one year and 105 euros. The option buyer, who thereby acquires the right to buy this share for 105 euros in one year, pays him 5 euros for it. The shareholder uses this money to purchase an equally expensive put option at a base price of 94 euros. The proceeds of the call option pay for the purchase of the put option.
If a year later the price of the share has risen to 110 euros, the shareholder has to sell the share for 105 euros to the purchaser of the purchase option, so, although the market price is 110 euros, he only receives 105 euros. His unrealizable gain in excess of 105 euros is the price the shareholder had to pay for the risk reduction. However, if the price of the stock falls instead of rising - e.g. B. to 90 euros - so the shareholder can sell his share with only 6% loss for 94 euros by exercising his put option.
However, the shareholder also loses the opportunity costs ; However, these are significantly lower than the 10 euros he would have lost per share without the costless collar.