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Hedging interest rate risk

5.4 Advantages and disadvantages of using a collar

ADVANTAGES DISADVANTAGES

 Flexibility – allows the company to  Limited flexibility – unlike with a
benefit from a favourable movement traditional option, the ability to
in interest rates benefit from a favourable interest
rate movement is limited
 (Net) premium cost is much
cheaper than with a traditional
option

Illustrations and further practice

Now try TYU 7 in Chapter 11

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