Equity Collar

CFA Level III Derivatives
#1

just for clarification, Equity collars are just

LONG CALL & SHORT PUT for someone who is using the collar to ensure the costs of liabilty is kept within the call and put strike price

SHORT CALL & LONG PUT for someone who holds an asset and uses the collar to ensure a minimum rate of return from the asset. he sacrifices the upside due to the short call

CORRECT?

i had it up to here with what i perceive to be unclear instructions from the text…maybe im just fustrated…prep is not going well :frowning:

#2

I agree with your 2nd statement: the short call provides the premium to pay for the downside protection from the long put. As well, one does sacrifice any gain above the call exercise price.

The first statement doesn’t ring a bell with me: are they assuming there is an asset that mimics the liabiiity? If so, I can argue that the long call effectively caps the liability at the call exercise price, To pay for this upside protection, I have to short a put, i.e. I have to give up some of my gain from the dropping liability value.

#3

cost of liability implies that you need to repay your liability at some point in the future. This equals to a short position of the underlying. When you have a short position, you want to eliminate the downside risk by long Call and given up some upside gain to offset the premium paid for the call, hence short put.

Yes, both of those are equity collar.

#4

thanks for the replies.

schweser sometimes just say that the investor is long equity collar…then u hvae to decopher from the question whether it is long call short put or short call long put…

#5

is this not the same as the first stmt? i LONG CALL SHORT PUT, in order to cap my liability at a certain level, i long call. then to defray the costs of the call, i short put. this in turn also limited how low my liability can go

#6

if you owned the asset - you would go long put - to insure the asset (protective put strategy). Now to defray the cost of the premium - you now sell a call - so you now reduced the cost of the insurance strategy.

I am really not clear about the liability aspect - where that figures with a equity strategy.Yes you might have an interest rate collar - but with equity - not seen this.

#7

The 2 statements are not equal. The key difference is that you are long the underlying for statement 2, but short the underlying for statement 1.

Looking over my old notes, the graph for statement 2 looks very similar to a bull spread. For statement 1, I suspect the graph would look like a bear spread.

#8

3 parts to a collar.

  • Long underlying

  • long put

  • short call.

It is outlined in most questions that the underlying is already held and therefore just the 2 options need to be dealt with

#9

I got all curious and went on teh interweb to look up equity collars. Of course, I found the standard type with the short call and long put, but I also found a “reverse equity collar” with a long call and short put.

#10

Second statement is correct and refers to an equity collar. - long equity - short call - long put

Your first statement seems to be refering to a interest rates collar which are used for floating rate asset/liability

a) Interest rates liability (pay floating) - floating liability - long call on int rates - short put on int rates

b) Interest rates asset (receive floating) - floating asset - long put on int rates - short call on int rates

#11

thanks for the clarification. i think the generic term to use should just be COLLAR

for a guy looking to have a minimum return on his asset

LONG PUT/FLOOR & SHORT CALL/CAP

for a dude looking to have a maximum cost on his liability

LONG CALL/CAP & SHORT PUT/FLOOR

#12

again I am asking the same question - what liability and why equity collar?

are you confusing between an equity collar and an interest rate collar?

#13

i think i am. can u pls elaborate on it more?

thanks a million