Collar Buy Cap Sell Floor

Break even point 80 1 50 81 50 share.

Collar buy cap sell floor.

As stated before a collar establishes a defined range floor and cap of interest rates the hedger is subjected to as opposed to a single fixed swap rate. The purchase of the cap protects against rising rates while the sale of the floor generates premium income. An interest rate floor is an agreed upon rate in the lower range of rates associated with a floating rate loan product. Buying the underlying asset buying a put option at strike price x called the floor selling a call option at strike price x a called the cap.

Interest rate floors are utilized in derivative. A common motivation for an organization to sell a floor is to raise cash to purchase a cap which creates an interest rate collar which bounds the organization s variable rate debt by the chosen cap and floor rates. A collar creates a band within which the buyer s effective interest rate fluctuates a reverse interest rate collaris the simultaneous purchase of an interest rate floor and simultaneously selling an interest rate cap. A collar is an options trading strategy that is constructed by holding shares of the underlying stock while simultaneously buying protective puts and selling call options against that holding.

The puts and the calls are both out of the money options having the same expiration month and must be equal in number of contracts. Some investors think this is a sexy trade because the covered call helps to pay for the protective put. Capped floater floater minus cap. These option products can be used to establish maximum cap or minimum floor rates or a combination of the two which is referred to as a collar structure.

Cost to implement collar buy put 77 write call 87 is a net debit of 1 50 share. The call you sell caps the upside. Interest rate caps floors and collars interest rate caps floors and collars are option based interest rate risk management products. You can think of a collar as simultaneously running a protective put and a covered call.

Caps floors and collars 3 capped floater consider the net position of the issuer of 100 par of a floating rate note who either buys a matching cap from a dealer or else embeds the cap in the note at issue. What have you got. Imagine buying a 1 70 libor cap and selling a 1 70 floor.