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elusive deal was sealed after Quaker spurned an earlier PepsiCo offer and a more recent offer from Coca-Cola had been withdrawn.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 ?
Cut the flea collar to fit your pet's neck, and use the remaining end of the collar in your vacuum bag to help kill the fleas in your home.
The Natural Resources Defense Council (NRDC) found that residue levels produced by some flea collars are 1,000 times higher than which the U.
They also want flea collars to wear around their ankles, and fly strips.
You must make sure she is on a good flea product, flea collars are not good enough.
As well as head lice shampoo, they are now used in household and garden bug-busters such as fly sprays, animal and carpet flea sprays, flea collars and garden insecticides under the names Malathion and Dichlorvos.
The fight against fleas, for instance, has been boosted with new concepts in the form of rechargeable flea collars, home fumigation kits, and the latest micro encapsulation technology -- as used in human deodorants.
Bio Bands are `alternative' flea collars impregnated with citronella and other oils with proven insect repellent odours.
The latest studies with ultrasonic flea collars indicate they are ineffective.
Chlorpyrifos are used in home-and-garden products, flea collars, and by the farming industry.
Because sand fleas are a problem, flea collars and flea wipes are also needed.
7 per cent as it sold fewer pet accessories such as flea collars, leashes and cat litter.
The donations, which also include pet supplies like flea collars, averages $4,000 monthly, said Deason, 40, who formed Love Buckets.