Price a Vanilla Collar

Updated December 03, 2024 14:49

In Fairways Debt, before booking a transaction, you can first price and simulate their schedules.

A collar is a security combining the purchase of a cap and the sale of a floor (buyer’s side) or the sale of a cap and the purchase of a floor (seller's side) to specify a range in which an interest rate will fluctuate. The security insulates the buyer/seller against the risk of a significant rise in a floating rate, but limits the benefits of a drop in that floating rate.

Note: Only currencies that are managed for the transaction can be selected.

Prerequisites

Enable the Pricer application for the customer account or the organization (contact your Finance Active consultant)
Enable the Vanilla Collar pricer (contact your Finance Active consultant)
Enable the relevant currencies (contact your Finance Active consultant)

Navigate to the Pricer Application

Log in to your Fairways Debt account.
Select a customer account.
Navigate to Applications > Pricer.

Price a Vanilla Collar

Click Vanilla Collar.
Complete the form with all relevant details.

Note: Fields marked with an asterisk * are mandatory.

Field	Description
Market Date	Date on which the option is priced.
Nominal	Nominal amount of the underlying cap and floor, and currency of the option and the underlying. Note: The reference interest rate (IBOR) is defined according to that currency.
Start Date	Unadjusted start date of the underlying cap and floor.
End Date	Unadjusted end date of the transaction.
Amortization	Notional or nominal depreciation over the life of the option. Note: Extra fields may display beside depending on the selected mode.
Rate	Progressivity rate. Note: This field only displays for the progressive amortization mode.
Frequency	Amortization frequency. Note: This field only displays for the straight line, progressive and custom amortization modes.

Field	Description
Index	Type of the index used to calculate the rate value. The list also includes the Risk-Free Rate (RFR) indexation related to the transaction currency (or IBOR if still published). The available indexes for each currency are as follows: CHF: SARON EUR: EURIBOR, ESTER, Term Ester GBP: SONIA, Term SONIA NOK: NIBOR SEK: STIBOR USD: Fed Funds, SOFR, Term SOFR, Average SOFR
Collar Type	Transaction direction: Buy Cap Sell Floor: Buyer's side Sell Cap Buy Floor: Seller's side
Result	Derivatives to price/solve. Note: The fields beside display depending on the selection.
Collar Price	Price of the collar. Note: This field only displays for the Solve Cap Strike and Solve Floor Strike results.
Cap Strike	Strike of the underlying cap. Note: This field only displays for the Price Collar and Solve Floor Strike result.
Floor Strike	Strike of the underlying floor. Note: This field only displays for the Price Collar and Solve Cap Strike results.
Frequency	Frequency of the interests perceived or paid. This frequency determines the tenor of the index (3 months, 6 months, etc.).
Day Count	Computes the day fraction of an interest accrual period.
Fixing Type	In Advance: The reference fixing is the one at the start of the interest rate period. In Arrears: The reference fixing is the one at the end of the period.
Fixing Offset	Number of days to move from the fixing type selected, can be earlier or later, e.g.: -2 for 2 days earlier 2 for 2 days later

Field	Description
Roll Convention	Date rolling convention. Note: The field value displays depending on the selected end date and stub.
Stub	Defines whether the last period should be a short or long stub when it does not match the selected frequency.
Calendar	Calendars with banking days and holidays of a specific city work with adjustments to provide an accurate schedule.
Payment Date Adjustment	Adjustment mode for the payment date.
First Regular Start Date	Start date of the stub. Note: This field only displays for the mixed stub.
Last Regular End Date	End date of the stub. Note: This field only displays for the mixed stub.

Click Apply.

Note: The value for the estimated market rate corresponds to the market rate for a standard transaction (same currency and standard index) with the same schedule (dates and outstanding balances).

The standard rates for the managed currencies are as follows:

CHF: SARON
EUR: ESTER
GBP: SONIA
USD: SOFR
Other currency: IBOR

The pricing results display.

Amortization

Mode	Description
Bullet	No depreciation during the lifetime of the transaction. Cumulative depreciations are counted at the end of the transaction term.
Linear	Constant depreciation.
Progressive	The rate is progressive.
Custom	Different values apply to each amortization.

Custom Amortization

Click Edit.

Double-click the relevant payback amount fields and enter their amounts.
Click Save.