Borrowing = Leverage, right?

so 2007 exam has a question on equity collar, private exchange fund etc. One of the 3 conditions is not to leverage and in answers they are saying either equity collar or exchange fund is good but I read that both of them can borrow fund and hence levered. Isn’t borrowing = leverage?

Good point. It looks like they were going for an equity collar, which isn’t levered (as I understand) because they’re mostly cashless, i.e. sold call covers the paid put. Private Exchange Fund can use leverage, but I guess the Ingram’s didn’t want to lever the portfolio returns? which could be (subtlely) different from borrowing against a stock… although that’s debatable. I only skimmed the answer key, not the question… why was the Public Exchange Fund (no leverage) no good?

equity collar can monetized the position which means can borrow.

Right. Maybe they added the monetized flavor after '07? otherwise their own answer is wrong. As said, you raise a good point

why the fk they are inconsistent in so many things.

because they suck royally

I don’t get it - you could construct a cashless collar and not spend any funds, how would that be using leverage?

yeah how is an equity collar leveraging? as long as it’s constructed as no cost, theres no borrowing, and no monetizing.

how about Exchange fund then?

If memory serves, that was an acceptable answer. their only beef with it was that it gives up pretty much any upside potential. remember what a private exchange fund is, you trade your shares for shares of an index fund. Unless your shares are in a huge cap company, your upside is potential is shot.

An exchange fund better enables you to borrow (your collateral pool is now well-diversified instead of one single stock), so you could borrow funds against it more easily. But its not necessary to employ leverage to participate. Of all the choices - only completion portfolio violates the leverage stipulation b/c it requires a lot of upfront capital (unless you have a large portfolio of other assets) and you would have to borrow most likely to obtain that capital


No one said it was no cost and while cost-free collars are possible we probably shouldn’t assume they are unless it’s stated in the question. In any case you pay up front for an option so there shouldn’t be leverage involved.