What is an exchange rate collar?

The collar is a combination of options guaranteeing buyers that the exchange rate at which they carry out their transactions for a given period will remain between a ceiling and a floor rate determined on the day the collar was purchased.

The collar is a compromise that allows businesses to regain some of the advantages of the foreign exchange option, but at a lower cost. It provides protection against an unfavourable rate fluctuation, but the business will only participate in part in any favourable exchange rate fluctuations.

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