The interest rate collector uses option contracts to hedge interest rate risk to protect floating rate borrowers from rate hikes or lenders from falling rates in the event of a reverse collar.
The collar involves the sale of a covered call option and the simultaneous purchase of a protective put option with the same expiration date, setting a lower limit and an upper limit on interest rates.
While the collar effectively hedges interest rate risk, it also limits any upside potential that would be provided by a favorable rate move.
A collar is an options strategy that involves buying a put option down and selling a put option up, which is used to protect against large losses but also cap large profits up.
A full ratchet is an anti-dilution provision that applies the lowest selling price as the option’s adjusted price or conversion rate to existing shareholders.
A long straddle is an option strategy that involves buying both a long call and a long put on the same underlying asset with the same expiration date and strike price.
The option-adjusted spread (OAS) measures the difference in yield between a bond with an embedded option, such as an MBS or callable, and the yield on a Treasury bond.