Forward conversion with Options

Is forward conversion with options the same as collar?

Not exactly. The options in a forward conversion usually have identical strike price with the goal of creating a riskless position that can be borrowed against (for the purposes of the LIII curriculum at least).

Can you give an example pls?


In the context of the L3 curriculum

A collar is used as a cost efficent hedging strategy where one hedges downside risk with a long put option and offsets the cost with the sale of a call option creating a position that is hedged between the two strike prices.

The forward conversion is a monetization strategy , usually put into place when the investor has a high portfolio concentration in a single security that cannot be sold. The goal here is to be able to borrow against the hedged position and invest the proceeds in a diversified portfolio. A better hedge means more of the value of the concentrated position can be borrowed against (think of the hedged position as collateral). You could hedge and monetize a position with a collar, but the collar does not eliminate all downside risk so the Loan to Value ratio would be less than if you bought the put and sold the call at he current stock price because with the collar the collateral is of lower quality.

A forward conversion with options is a (future) synthetic short position.

i am so bad at all of these… need to review all of them… i wonder if CFAI considers this seciton PWM or Derivs. Its mainly disucssed in the PWM/concentrated posiitons section.

If you want at the money put options as protective put, it will eliminate all the downside risk so the Loan to value ratio should be as high as with forward conversion with options?

Am I missing something?

You’re right but that is more expensive and the point is to use the cash to invest in a diversified portoflio to attain the appropriate risk exposures.