Lesson 17 of 25 · 7 min

Why a collar can raise an advance rate, and why it may not

A band narrows the decline a lender must survive, but only a schedule that reads the band can price it.

Lesson 9 built the haircut out of an adverse move over a liquidation window. A floor caps that adverse move by contract, so a schedule that recognises the floor can lend against it instead of against the market price. That is the whole mechanism by which a collar can raise an advance rate.

Continue the position from lesson 16: $1,156,700 of a single name at a 50 percent advance rate, so lending value $578,350. If the schedule recognises the collar and advances 88 percent against the $1,010,500 floor, lending value becomes $889,240, an increase of $310,890. The floor did not change the shares; it changed what the lender has to survive.

Conditions a schedule typically imposes before it will read the band at all:

The put is held in the pledged account and is itself pledged, so the lender can exercise it.
The expiry extends beyond the horizon the schedule assumes for a liquidation.
The strike sits within a stated distance of the market price, so the floor is not merely nominal.
The put cannot be sold or the strike lowered without the lender's consent.

Fail one of them and the position is priced as unhedged, while the written call keeps its own consequences. If that call's margin requirement is $96,000 and it is held inside the pledged account, usable lending value is $578,350 − $96,000 = $482,350. The collar has then reduced the line by $96,000 while narrowing the distribution to a 28-point band. Both statements describe the same account on the same day.

Recognition is a schedule term, not a property of the structure. The identical two contracts move lending value up $310,890 or down $96,000 depending on where they sit and what the schedule reads.

Key terms

Floor-based lending value: Lending value computed from the contractual floor instead of the market price. It is normally higher, because less can be lost.
Recognition conditions: The requirements a hedge must satisfy before a schedule will price it, mostly concerning location, expiry and strike distance.
Usable lending value: Lending value after subtracting collateral committed to other obligations, such as margin on a written option.

Worked example

One collar, two schedules

A single name worth $1,156,700 at a 50% advance rate, collared with a floor of $1,010,500 and a written call requiring $96,000 of margin inside the pledged account. Illustrative schedule.

Lending value, no recognition: $578,350
Recognised: 88% of the floor: $889,240
Increase if recognised: $310,890
Not recognised: usable lending value: $482,350
Decrease if not recognised: $96,000
Spread between the two treatments: $406,890

The economics of the collar were identical in both rows. The collateral consequence differed by $406,890.

Check yourself

A collared holding is worth $1,480,000 with a floor of $1,258,000. Unhedged it carries a 46% advance rate; recognised, the schedule advances 85% against the floor. How much does recognition change lending value?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.