Collar Buy Cap Sell Floor

Interest rate caps floors and collars interest rate caps floors and collars are option based interest rate risk management products.

Collar buy cap sell floor.

Capped floater floater minus cap. Cost to implement collar buy put 77 write call 87 is a net debit of 1 50 share. 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. Break even point 80 1 50 81 50 share.

What have you got. The purchase of the cap protects against rising rates while the sale of the floor generates premium income. The maximum profit is 15 500 or 10 contracts x 100. An interest rate floor is an agreed upon rate in the lower range of rates associated with a floating rate loan product.

You can think of a collar as simultaneously running a protective put and a covered call. 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 puts and the calls are both out of the money options having the same expiration month and must be equal in number of contracts. 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.

Some investors think this is a sexy trade because the covered call helps to pay for the protective put. 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 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 is created by.

The call you sell caps the upside. 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. Imagine buying a 1 70 libor cap and selling a 1 70 floor.