Collar Buy Cap Sell Floor

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.

Collar buy cap sell floor.

An interest rate floor is an agreed upon rate in the lower range of rates associated with a floating rate loan product. The maximum profit is 15 500 or 10 contracts x 100. You can think of a collar as simultaneously running a protective put and a covered call. So you ve limited the downside on the stock for less than it would cost to buy a put alone but there s a tradeoff.

Some investors think this is a sexy trade because the covered call helps to pay for the protective put. What have you got. Break even point 80 1 50 81 50 share. Capped floater floater minus cap.

Interest rate floors are utilized in derivative. 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. The purchase of the cap protects against rising rates while the sale of the floor generates premium income. 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 caps floors and collars interest rate caps floors and collars are option based interest rate risk management products. 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. Cost to implement collar buy put 77 write call 87 is a net debit of 1 50 share. 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.

Imagine buying a 1 70 libor cap and selling a 1 70 floor. A collar is created by. 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.