The Law Dictionary

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COLLAR AGREEMENT Definition & Legal Meaning

Definition & Citations:

1. In Purchasing, this is an agreement to freeze the maximum limit, ceiling or cap, and/or the minimum limit, or floor. 2. In Investing:, this is a provision in a stock-swap acquisition for adjustment of the ratio of the swapped stocks if the worth of either stock falls or rises above a certain limit before the finalizing the deal. 3. In Index futures, this is the stock or commodity exchange volatility level triggering a circuit breaker to temporarily halt the automated trading system. 4. In Securities trading:, this is the (1). Purchase of two options at the same time to protect against wide fluctuations in interest rates. One is called a cap or ceiling and covers increases while the other is called a floor and covers decreases in interest rates beyond specified limits. (2). Purchase of an in-the-money put option and the sale of an out-of-the-money call option at the same time to mitigate market risks against both upside and downside movement. Known also as collar.


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