collar investment & finance definition
- A
restriction on index-arbitrage trading, which is also called program trading.
Collars are imposed to keep markets
stable by restricting extreme price movements. An example of a collar is the
one instituted by the New York Stock Exchange. Under New York Stock Exchange rules,
if the Dow Jones Industrial Average moves up or down 2 percent from the average
closing value of the DJIA for the last month during the previous quarter,
collars are instituted. If the market erases half of that move, the trading
collars are removed. The NYSE sets the equivalent point level quarterly. Other
exchanges may have their own collars. Also called trading
collars.
- In the
context of mergers, collars may be used to set minimum and maximum prices the
acquiring company will pay. Setting collars is often necessary in the
acquisition of publicly traded companies because the price of the companies’
stock may vary greatly between the time the deal was announced and when it
actually closes many months later.
- A supply
contract between a buyer and seller of a commodity, in which the buyer is
assured that he or she will not have to pay more than some maximum price, and
the seller is assured of receiving some minimum price. Also called option fence
and range forward.
See collar in Wall Street Words
- In options, buying a put and selling short a call so as to limit the potential profit and loss from an investment position.
- The level at which an index triggers a circuit breaker to temporarily stop trading.
- In an acquisition, an upper and lower limit that will be paid for shares of the company to be acquired.
- In a new issue, a limit on the price or interest rate that is acceptable. See also zero-cost collar.
Case Study In December 2000 PepsiCo, Inc., announced it would acquire Quaker Oats Co. for $13.4 billion in PepsiCo stock. The elusive deal was sealed after Quaker spurned an earlier PepsiCo offer and a more recent offer from Coca-Cola had been withdrawn. Both soft drink giants were after Quaker's noncarbonated beverages, including Gatorade. The deal specified that PepsiCo would offer 2.3 shares of its stock for each share of Quaker. At a then-current PepsiCo stock price of $42.38, the Quaker shares were each valued at $97.46. The agreement also provided a minimum and maximum value, or collar, for the Quaker stock. PepsiCo guaranteed a minimum price of $92 per Quaker share in the event PepsiCo stock fell below $40 for ten random days during the month prior to closing. Likewise, PepsiCo would be required to pay no more than $105 per Quaker share in the event PepsiCo stock increased to more than $45.65. The collar of $92 to $105 provided a maximum and minimum value that Quaker stockholders would receive for each of their shares. The earlier PepsiCo offer specified the same 2.3-to-1 exchange rate but had been rejected by Quaker because PepsiCo was unwilling to include a collar as part of the offer. In other words, PepsiCo refused to guarantee a minimum price for the Quaker stock it wanted to acquire.
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