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Collar 2.
A derivative that combines a cap and a floor of the same duration, in relation to the same floating rate index.
The purchase of an interest rate collar, which consists in the purchase of a cap and the sale of a floor, insulates a borrower against a rate increase beyond the specified cap, but limits the benefits of a rate drop below the specified floor. Conversely, the sale of an interest rate collar, which consists in the sale of a cap and the purchase of a floor, insulates a lender against a rate drop below the specified floor, but limits the benefits of a rate increase beyond the specified cap.
Translations
Synonyms and variations
- Interest rate collar