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elusive deal was sealed after Quaker spurned an earlier PepsiCo offer and a more recent offer from Coca-Cola had been withdrawn.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 periodicals archive ?
Price will be wearing a brace to keep his collar-bone in place for the next six weeks and cannot train during that period.
The X-rays confirmed that I had broken my left collar-bone," he said.
I've sprung the joint in my collar-bone and it's got to be said I must be doubtful for Saturday, but I will have physio to see if I can make it.
O'Ryan said yesterday: "The collar-bone is broken in two places and it was also dislocated.
PAUL CARBERRY, who feared he would miss the Cheltenham Festivalafter fearing he had broken his collar-bone in a fall at Navan on Sunday,was delighted yesterday to learn that the only things broken were tworibs.
But that was countered by the revelation that skipper Brian Andersen, nursing a collar-bone injury after crashing in Sweden last week, will make a shock return to the saddle.
He reported: "Paul has broken the collar-bone and they think it could be a bad break.
PAUL CARBERRY sustained a broken collar-bone at Navan yesterday and faces a race against time to be fit for Cheltenham.
It seems certain that I will need another operation on my right collar-bone, possibly even a bone graft this time, but it could wait until the season is over.
Tormey suffered more, breaking his right collar-bone when Tipstaff fell at the first in the two-mile chase, about 30 minutes after the jockey had won the Intercity Champion Hurdle Trial on Master Beveled.
He damaged his troublesome right collar-bone in a frightening crash in Sweden on Tuesday night, aggravating the 1997 break that has failed to heal properly.
COMEBACK KID Leighton Aspell ended up in hospital with a broken collar-bone last night as his nightmare week took another downward turn.