Zero Cost Collar

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Zero Cost Collar

An investment strategy in which one buys or sells one position while taking an opposite position for the same price that will limit both the return and the risk of one's investment. An investor sells a position that caps return while buying one that limits loss, while a borrower does the opposite. A zero-cost collar may be used for options, stocks, interest rates, or commodities. See also: Collar.
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The most common derivative instruments used by insiders are: 1) prepaid variable forwards (forwards), 2) zero-cost collars (collars), 3) exchange funds, and 4) equity swaps.
Zero-Cost Collars (Collars) and Prepaid Variable Forward Contracts (Forwards)
Lemmon, 2001, "Managerial Ownership, Incentive Contracting, and the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders," Journal of Financial and Quantitative Analysis 36, 345-370.
Percentage of Ownership and Dollar Amount Covered by Each Derivative Security Percentage of Ownership Invested N Mean Median Zero-Cost Collars 227 31.
The Securities and Exchange Commission requires insiders to report their purchases of zero-cost collars and similar derivatives.
In August 2009, the Company entered into agreements for two zero-cost collars for 2010, the first on 5,000 MMBtu of natural gas per day with a $4.
Berry Petroleum Company (NYSE:BRY) has entered into zero-cost collars for approximately 10,000 barrels of oil per day for the period January 1, 2006 through December 31, 2009.
Primarily due to this significant price movement, the Company has hedged approximately one third of its crude oil production for the next 12 months using zero-cost collars to lock-in attractive profitability on those barrels and partially protect the Company from a near-term price decline.