Zero Cost Collar

Business, Legal & Accounting Glossary

Definition: Zero Cost Collar


Zero Cost Collar


What is the dictionary definition of Zero Cost Collar?

Dictionary Definition


  • The price of call equals the price of put in a collar. See collars.
  • Is a transaction that has little or zero cash outlay or cost for the initiating person. Often, a security is held and some protection is sought via a hedging transaction. One example, would be the purchase of an out-of-the-money put (debit) and the sale of an out-of-the-money call (credit). Here, the premiums for the debit and credit are nearly the same. Therefore, there would be little or no cost for the person seeking the hedge. However, this position places a cap on the potential reward for holding the underlying asset. Essentially, the protection does not kick in until the price of the underlying instrument goes below the exercise price for the put. Generally speaking, it should be noted that if the hedge occurred with both options at-the-money, then the person replicated a synthetic short against an actual long position. For the latter, the hedge would be considered delta-neutral whereas using two out-of-the-money options, the hedge at the origination would not be delta neutral. Rather, it would be computed as a partial hedge when placed.

Full Definition of Zero Cost Collar


A zero cost collar or zero cost option is an option technique applied to secure a return. Also called “equity risk reversal” a zero-cost collar is a type of positive carry collar. The zero-cost collar is executed by buying a cap and a floor. Zero cost collar option strategies are employed for interest rates, commodities, options, and equities trading. An example of a zero-cost collar option purchase is buying a put and selling a call at a lower strike price. The zero-cost collar works because the sale of the call will cap the return if the underlying falls in price and offsets the purchase of the put. Hedging with zero cost collar options meets FASB 133 derivatives hedging standards if the zero cost collar is written with a single underlying reference asset. Upside risk is still unlimited in a zero-cost collar.


Related Phrases


Accelerated cost recovery system
Agency cost view
All in cost
Average cost of capital
Bankruptcy cost view
Break even analysis cost volume profit analysis
Capital cost allowance
Collar
Cost basis
Cost benefit ratio
Cost company arrangement
Cost of a new issue of common stock
Cost of capital
Cost of carry
Cost of common equity
Cost of debt
Cost of equity
Cost of funds
Cost of funds index
Cost of giving up a cash discount
Cost of goods sold
Cost of lease financing
Cost of limited partner capital
Cost of living adjustment
Cost of long term debt
Cost of new asset
Cost of preferred stock
Cost of retained earnings
Cost yield
Dollar cost averaging
Equity collar
Equivalent annual cost
Fixed cost
Incremental cost of a new asset
Installation cost
Installed cost of new asset
Marginal cost of capital
Marginal cost of capital schedule
Net financing cost
Opportunity cost
Opportunity cost of capital
Product cost
Replacement cost
Shortage cost
Total cost of inventory
True interest cost
Variable cost
Weighted average cost of capital
Zero balance account
Zero beta portfolio
Zero coupon bond
Zero curve
Zero growth model
Zero investment portfolio
Zero minus tick
Zero one integer programming
Zero or low coupon bonds
Zero plus tick
Zero prepayment assumption
Zero sum game
Zero uptick


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Definition Sources


Definitions for Zero Cost Collar are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 26th November, 2021 | 0 Views.