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collar definition - finance
  1. A restriction on index-arbitrage trading, which is also called program trading. Collars are imposed to keep markets stable by restricting extreme price movements. An example of a collar is the one instituted by the New York Stock Exchange. Under New York Stock Exchange rules, if the Dow Jones Industrial Average moves up or down 2 percent from the average closing value of the DJIA for the last month during the previous quarter, collars are instituted. If the market erases half of that move, the trading collars are removed. The NYSE sets the equivalent point level quarterly. Other exchanges may have their own collars. Also called trading collars.
  2. In the context of mergers, collars may be used to set minimum and maximum prices the acquiring company will pay. Setting collars is often necessary in the acquisition of publicly traded companies because the price of the companiesÂ’ stock may vary greatly between the time the deal was announced and when it actually closes many months later.
  3. A supply contract between a buyer and seller of a commodity, in which the buyer is assured that he or she will not have to pay more than some maximum price, and the seller is assured of receiving some minimum price. Also called option fence and range forward.

Webster's New World Finance and Investment Dictionary Copyright © 2003 by Wiley Publishing, Inc., Indianapolis, Indiana.
Used by arrangement with John Wiley & Sons, Inc.

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