What is COLLAR AGREEMENT?

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.

More On This Topic



Link to This Definition
Did you find this definition of COLLAR AGREEMENT helpful? You can share it by copying the code below and adding it to your blog or web page.
Written and fact checked by The Law Dictionary