Collar


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Collar

Refers to the ceiling and floor of the price fluctuation of an underlying asset. A collar is usually set up with options, swaps, or by other agreements. In corporate finance, the collar strategy of buying puts and selling calls is often used to mitigate the risk of a concentrated position in (sometimes) restricted stock. When the restricted owner can't sell the stock, but needs to diversify the risk, a collar transaction is one of the few tools available. Many corporate executives who receive chunks of their compensation in restricted stock need to employ this strategy to mitigate the diversification risk in their overall portfolio.

Collar

1. A way to hedge against the potential of loss by buying an out-of-the-money put while writing an out-of-the-money call. A collar is most beneficial when an investor holds a stock that has recently experienced significant gains. If the stock falls, the investor can exercise the put, ensuring a profit. If it continues to rise, the call places a cap on the profit.

2. On an exchange, a measure designed to prevent panic selling by stopping trading after a security or an index has fallen by a certain amount. For example, if the Dow Jones Industrial Average falls 10% in a trading day, the New York Stock Exchange suspends trade for at least one hour. A collar is intended to allow investors to determine whether a situation is really as bad as it looks. It is sometimes called a circuit breaker. See also: Suspended trading.

collar

1. In options, buying a put and selling short a call so as to limit the potential profit and loss from an investment position.
2. The level at which an index triggers a circuit breaker to temporarily stop trading.
3. In an acquisition, an upper and lower limit that will be paid for shares of the company to be acquired.
4. In a new issue, a limit on the price or interest rate that is acceptable. See also zero-cost collar.
Case Study In December 2000 PepsiCo, Inc., announced it would acquire Quaker Oats Co. for $13.4 billion in PepsiCo stock. The elusive deal was sealed after Quaker spurned an earlier PepsiCo offer and a more recent offer from Coca-Cola had been withdrawn. Both soft drink giants were after Quaker's noncarbonated beverages, including Gatorade. The deal specified that PepsiCo would offer 2.3 shares of its stock for each share of Quaker. At a then-current PepsiCo stock price of $42.38, the Quaker shares were each valued at $97.46. The agreement also provided a minimum and maximum value, or collar, for the Quaker stock. PepsiCo guaranteed a minimum price of $92 per Quaker share in the event PepsiCo stock fell below $40 for ten random days during the month prior to closing. Likewise, PepsiCo would be required to pay no more than $105 per Quaker share in the event PepsiCo stock increased to more than $45.65. The collar of $92 to $105 provided a maximum and minimum value that Quaker stockholders would receive for each of their shares. The earlier PepsiCo offer specified the same 2.3-to-1 exchange rate but had been rejected by Quaker because PepsiCo was unwilling to include a collar as part of the offer. In other words, PepsiCo refused to guarantee a minimum price for the Quaker stock it wanted to acquire.
References in classic literature ?
You said he had a pal," I observed, sinking deeper into the collar of my coat.
I had not asked him, and I was almost foaming under the respirator that I was making of my overcoat collar.
Yet what of Matthew's white collar and the sorrel mare?
It is surprising how well you preserve your teeth, Miss," said the collar.
They stood so still that she quite forgot they were alive, and she was just looking round to see if the word "TWEEDLE" was written at the back of each collar, when she was startled by a voice coming from the one marked 'DUM.
Now and again he pulled and tugged at the collar which nearly choked him and cried out in a weak voice:
Pickwick emerges from his coat collar, and looks about him with great curiosity; perceiving which, the coachman informs Mr.
Utterly preposterous as his cravat was, and as his collars were, I was conscious of a sort of dignity in the look.
Rupert's Cavaliers were every bit as particular about their lace collars and frills as the lady whose pretty limbs once warmed this cambric.
He "rubbed out' collars and cuffs, rubbing the starch out from between the double thicknesses of linen so that there would be no blisters when it came to the ironing, and doing it at a pace that elicited Joe's praise.
They made a queer picture, indeed; for they wore wide, white collars around their necks and the collars had many scallops and points.
By a chance, she got a position in an establishment where they made collars and cuffs.