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Interest Rate Collar
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Interest Rate With and Without Zero Premium Collar A combination of an interest rate cap and an interest rate floor. The buyer of the collar purchases the cap option to limit the maximum interest rate he will pay and sells the floor option to obtain a premium to pay for the cap. The effect of the combination is to confine interest rate payments to a range bounded by the strike prices of the cap and floor options. On the other side of the trade, an asset manager might sell a cap and give up the potential for unlimited upside yield in return for the assurance of a minimum return obtained by using the proceeds from the cap to purchase a floor. Also called Cap and Floor, Fence or Fence Spread, Range Forward Contract (diagram), Forward Rate Bracket, Equity Risk Reversal (diagram), Conversion Spread, Spread Conversion. See also Collar (2) (diagram), Free Collar. See Mini-Max Strategy.
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