Collar, Financial Management

Collar

A collar can be established by holding a share, along with purchasing a protective put and writing a covered call, where both options at out-of-money..

For Example - ONGC

Underlying stock = Rs. 809

Buy Mar Rs. 800 Put @ Rs.16

Write Mar Rs. 880 Call @ Rs.7.25

 

Total price for this strategy = 809 + 16 + 7.25 = Rs. 832.25

 

Maximum Profit: Limited

Call strike - Initial spot price - Put Premium = 880 - 809 - 16 = Rs. 55

Maximum Loss: Limited

Initial spot price - Put strike + Call Premium = 809 - 800 + 7.25 = Rs. 16.25

So an arbitrage opportunity to the tune of Rs. 55 (max) is available if the price target of Rs. 880 or beyond is achieved. On the flip side, we have losses, which are capped at a maximum of Rs 16.25 for price Rs. 800 and below.

Posted Date: 7/25/2012 7:32:37 AM | Location : United States







Related Discussions:- Collar, Assignment Help, Ask Question on Collar, Get Answer, Expert's Help, Collar Discussions

Write discussion on Collar
Your posts are moderated
Related Questions
The face value of the debt security can be thought of as the principal amount on which interest is paid by the issuer. It is the amount the issuer is willing to r

The RBI, on behalf of the government, issues all T-Bills and Government dated securities. Being risk-free securities, they set the benchmark for the interest rate

Determine the term- Investment decision Investment decision is broadly concerned with asset-mix or composition of the assets of a firm. Concern of the financing decision is wit

What are the three major sections of the statement of cash flows? Cash flows from financing activities Cash flows from investing activities Cash flows from Operations

What is the usual pattern of cash flows for a share of preferred stock? How does the market determine the value of a share of preferred stock, given these promised cash flows?

An investor, who wants to sell a bond even before it reaches its maturity date, would be concerned as to whether he will receive a price that is close to the true

Principles of Financial Accounting and Management 1. Define Accounting. Briefly explain the ‘Entity Concept' and ‘Money Measurement Concept' of accounting. 2. What is rectif

Criticism of Profit Maximization Approach: (i) Ambiguous: - One practical complexity with this approach is that the term profit is ambiguous. Different people take dissimilar me

Do a Gantts Chart, project-managing the Budget process. This task should contain a well designed chart with tables and discussion. Budgeting thus is identified as a project to be m

A 16% debenture of R5 000 is redeemable at a premium of 10% after 5 years. The fair rate of return on similar debentures is 14% before tax. Calculate the present value of the capit