By selling a cap you will give up some of the possible benefit of higher interest rates. How much of this benefit you give up will depend on the interest rate level at which you sell the cap. If the value of the cap you sell is the same as the cost of the floor you buy, this structure is known as a 'Zero-Cost Collar'. The term Interest-Rate Collar comes from the fact that your rate of return will never be lower than the floor level and will never be greater than the cap level. The collar guarantees your firm a set range for the interest rate return on your cash.
Collars are popular ways of managing interest rates on long-term cash deposits.
We can tailor a collar to suit you. When interest rates fall below the floor we will pay you compensation. When interest rates settle within the range of the collar, neither of us has to pay anything. The benefits The collar reduces the cost of interest-rate protection. The collar still provides protection against lower interest rates.