question archive Many companies use three-way collars to manage their commodity price exposure
Many companies use three-way collars to manage their commodity price exposure
Subject:FinancePrice: Bought3
Many companies use three-way collars to manage their commodity price exposure. Consider the following three-way collar: Buy a cap with strike price $1.55, sell a cap with strike price $1.70, and sell a floor with strike price X $/gallon. Based on the prices given in Exhibit 2 for the two caps, use Derivagem and trial and error to find the strike price of the floor that makes the three-way collar costless. Compare this three-way collar with a two-way collar like the one presented in the case in terms of benefits and risks.
