A zero cost collar:
A) is risk-free.
B) is designed to offset margin requirements.
C) has a larger premium than a reverse collar.
D) designed so the buyer has no net premium payment.
E) None of the above.

Question

Quizplus · Accepted Answer

A zero cost collar is designed so that the buyer has no net premium payment, meaning that the premium paid for the purchase of a put option is offset by the premium received from the sale of a call option. This provides downside protection while limiting upside potential. It is not risk-free and may not necessarily offset margin requirements. The premium for a reverse collar is not relevant to the characteristics of a zero cost collar.

A Zero Cost Collar