# Zero-cost collar

As we don’t post questions from schweser anymore. I just post the statement that I found confusing. “To create a zero-cost collar, a portfolio manager goes long a cap and short a floor where both the cap and floor have the same strike rate, settlement frequency, and maturity.” Can this statement be correct? How you will ensure that call and put with same strike price will have equal premium?

usually you adjust the strikes on the call and put so the premium is equal… they are usually not so the strikes will usually be different… and usually: call strike> current price> put price (but not always)…

This is not correct, given the put-call parity

if you are long the stock… i would buy a put with a lower strike and sell a call with a higher strike…that’s what I meant… maybe i am mistaken…

Thank you! The question was asking which is least accurate. Acc. To Schweser, this was not the least accurate.

To me it looks correct. You can ensure they have an equal price and premium because you wouldn’t create a zer-cost collar any other way. Basically, you have to create the collar by selecting the options. If you can’t find a put and call with the same strike, premium, and maturity you can’t create the zero cost collar.

For sero cost collar, the premiums should be equal. Not the strike price. When strike prices are equal it is unlikely you would have the same offsetting premiums. Just imagine the put call parity. They have same strike rices and naturally different premiums.

Yep, zero cost requires a long and a short position, with the premium of the long paid for by the premium received on the short. I suppose that the strike prices could be equal under ideal conditions, but I’d think there’d be some inefficiencies there.

bchadwick Wrote: ------------------------------------------------------- > Yep, zero cost requires a long and a short > position, with the premium of the long paid for by > the premium received on the short. I suppose that > the strike prices could be equal under ideal > conditions, but I’d think there’d be some > inefficiencies there. is this for interest rate zero collar? if so, i would argue same strike, exp, would be same premium.

MFE Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > Yep, zero cost requires a long and a short > > position, with the premium of the long paid for > by > > the premium received on the short. I suppose > that > > the strike prices could be equal under ideal > > conditions, but I’d think there’d be some > > inefficiencies there. > > > is this for interest rate zero collar? if so, i > would argue same strike, exp, would be same > premium. can you prove it?