- In the explanation, it said since the collar sets a min value for the underlying equity it may increase the latter’s collateral value. Is not intuitive to me. Can someone explain to me what it is? many thanks!
By constracting a collar (buying a put and selling a call), you are insurring that your underlying will be worth at least as much as exercise price on the put (i.e. stock now worth $100 and you buy a put with exercise of $90, $90 is your worst case scenario). When you pledge this underlying as collateral, the other party is sure that it will be worse at least $90. If you pledge the underlying without any protection attached to it, the value of it can potentially go to $0 and it can become worthless collateral. Hence, the collar may increase underlying collateral value.
thank you, volkovv