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Zero-Cost Collar (Floating-Rate Instrument)

A zero-cost collar that is constructed by combining a call option and a put option to the effect that protection on the downside is secured at the expense of giving up any upside profit potential beyond a specific level. The put/floor strike and the call/cap strike are determined so that the premium paid for the put/floor exactly matches the premium received from the sale of the call/cap. Therefore, this structure is said to be virtually “zero cost” (virtually so due to the fact that transaction costs are not zero).

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