Editing Interest rate cap and floor (section)

==Interest rate collars and reverse collars==
An '''interest rate collar''' is the simultaneous purchase of an interest rate cap and sale of an interest rate floor on the same index for the same maturity and notional principal amount.
* The cap rate is set above the floor rate.
* The objective of the buyer of a collar is to protect against rising interest rates (while agreeing to give up some of the benefit from lower interest rates).
* The purchase of the cap protects against rising rates while the sale of the floor generates premium income.
* A collar creates a band within which the buyer's effective interest rate fluctuates

A '''reverse interest rate collar'''  is the simultaneous purchase of an interest rate floor and simultaneously selling an interest rate cap.
* The objective is to protect the bank from falling interest rates.
* The buyer selects the index rate and matches the maturity and notional principal amounts for the floor and cap.
* Buyers can construct zero cost reverse collars when it is possible to find floor and cap rates with the same premiums that provide an acceptable band.