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elusive deal was sealed after Quaker spurned an earlier PepsiCo offer and a more recent offer from Coca-Cola had been withdrawn.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 ?
Whether high-necked or plunging, soft collarless blouses replace stiff business shirts for a sensual Mediterranean laidback mood.
The collarless jacket is stylish and the patent pumps bring the whole thing together.
Camel collarless leather coat pounds 185, patent leopard-print tote pounds 38, tan cage shoes pounds 45.
He was collarless, very thin, very hungry and pathetic, but so friendly.
He looked unkempt and in some distress as he stepped delicately from his car wearing blue pyjama bottoms, slippers and a collarless white shirt.
The other is 5ft 8in, stocky, with tattoos on his arm, and he wore a black collarless shirt, black trousers and trainers.
Take the 60s trend literally and team with a collarless coat and knee-high boots, or toughen up this feminine dress with brogues and blazer.
99 from TK Maxx Blue collarless mac pounds 35 by F&F at Tesco Betty Jackson black zip mac pounds 80 at Debenhams Next purple belted mac, pounds 58 Trench coat, pounds 29 from Apricot
IF you love minimalism, go sleek with your outerwear in Marks & Spencer's collarless coat, pounds 55.
On another occasion Blair wore "an extraordinary collection" of a white collarless shirt, blue trousers and England football slippers "with three lions on them".
The kit has a distinctive thick white strip down the left hand side of the collarless shirt which has a club crest above the logo of main sponsors Redrow.