ACCA AFM Syllabus E. Treasury And Advanced Risk Management Techniques - Interest rate collar - Notes ^{10 / 13}

A collar involves the simultaneous purchase and sale of both call and put options at different exercise prices

The main advantage of using a collar instead of options to hedge interest rate risk is lower cost.

However, the main disadvantage is that, whereas with a hedge using options the buyer can get full benefit of any upside movement in the price of the underlying asset, with a collar hedge the benefit of the upside movement is limited or capped as well.