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elusive deal was sealed after Quaker spurned an earlier PepsiCo offer and a more recent offer from Coca-Cola had been withdrawn.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 ?
The collar was a little jagged at the edge, and so came the long scissors to cut off the jagged part.
Here, the fat boy burst forth into stentorian blubberings, and was led forth by the coat collar, by Mr.
Thereupon he took the dog with the golden collar, and said: 'That is the wretch
Taking a last whiff of his cigarette he threw it down, stepped on it, and letting the smoke escape through his moustache and looking askance at the horse that was coming up, began to tuck in his sheepskin collar on both sides of his ruddy face, clean-shaven except for the moustache, so that his breath should not moisten the collar.
When he buttoned the collar in front, its points served to cover the cheeks, chin and mouth were buried in its depths, and a close scrutiny revealed only shadowy eyes and a little less shadowy nose.
That is only the place where the collar is put on at night to keep me chained up; it chafes a bit, but one soon gets used to it.
Now a bit of pink ribbon to tie it with, and I shall be done in time to do up my best collar," she said, turning her boxes topsy-turvy for the necessary ribbon in that delightful flurry which young ladies feel on such occasions.
And yet here was Matthew Cuthbert, at half-past three on the afternoon of a busy day, placidly driving over the hollow and up the hill; moreover, he wore a white collar and his best suit of clothes, which was plain proof that he was going out of Avonlea; and he had the buggy and the sorrel mare, which betokened that he was going a considerable distance.
They were standing under a tree, each with an arm round the other's neck, and Alice knew which was which in a moment, because one of them had 'DUM' embroidered on his collar, and the other
He opened the trap, grabbed the Marionette by the collar, and carried him to the house as if he were a puppy.
I seized the Sergeant by the collar of his coat, and pinned him against the wall.
His wristbands and collar were oppressive; his voice and manner were oppressive.