An agreement to receive payments as the buyer of an option, cap, or floor and to make payments as the seller of a different option, cap, or floor is called:

Question

Options

• ADerivative
• BMiscellaneous
• CObligatory
• DCollar

• A
  6% (2)
• B
  8% (3)
• C
  3% (1)
• D
  83% (30)

Explanation

D is correct because a collar is precisely defined as the simultaneous position of being a buyer of one option/cap/floor (receiving payments when triggered) and a seller of a different option/cap/floor (making payments when triggered) - it "collars" exposure between two boundaries.

Why the distractors are wrong:

• A (Derivative) is too broad - caps, floors, and collars are all derivatives, so "derivative" describes the category, not this specific combined structure.
• B (Miscellaneous) is not a recognized financial instrument classification at all.
• C (Obligatory) is not a standard financial term for any option structure.

Memory tip: Picture a dog collar - it constrains movement in both directions. A financial collar limits your exposure from two sides: you buy protection on one end (paying a premium, receiving if breached) and sell protection on the other end (receiving a premium, paying if breached), bounding your risk - and cost - within a "collar."

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