instruments in interest-rate, currency and ... - Volksbank AG

COLLARWhat is a collar?A collar is the purchase of a cap and is fixed simultaneously with the sale of a floor. The interest-rate risk ishedged by a cap, at the same time as a floor is fixed. The objective of a collar is to reduce the cost of a cap. Bypurchasing a collar, however, the company can benefit from a possibly decreasing interest rate only until thefloor is reached.A special type of collar is the zero cost collar, i.e. a cap where no option premium is payable at the beginningof the contract because the proceeds from the sale of the floor are equivalent to the cost of purchasing a cap.Determinants of a collarn Currency and nominal amountn Term to maturity: between 2 and 10 yearsn Strike price: amount of the cap or floorn Reference rate: EURIBOR, LIBOR, ...n Roll-over dates: dates when strike price and reference rate are compared;3, 6, 9 or 12 monthsn Premium: non-current premium at the beginning of the term of the contract, defined inpercent of the underlying nominal amount or annualised over the totalHedging profile: collarTermination of collaris possible at any time through a back-to-back transaction or cash-out.31