zero cost collar

CFA Level III
#1

Guys,

I keep bumping into weird answers in the CFAI exams…

Zero cost collar = short OTM call + long OTM

Risk reversal = short OTM put + long OTM call

Agree?

Then why does Question 7 from the 2010 CFAI essay exam state the following?

"A zero cost collar would lose a limited amount of money if the U.K. loses the bid, and

would make only a limited profit (compared to a straddle) if the U.K. wins the bid."

#2

There is protection on the downside but limited profit on the upside: the rule of the collar.

#3

So I need to always assume that I’m long the stock… I get it