will exercise the purchased call; the investor effectively sells the shares at the $7 strike price. This would lock in a $2 profit for the investor. He only makes a $2 profit (minus fees), no matter how high the share price goes. For example, if the stock price goes up to $11, the buyer of the call will exercise the option and the investor will sell the shares that he bought at $5 for $11, for a $6 profit, but must then pay out $11 – $7 = $4, making his profit only $2 ($6 − $4). The premium paid for the put must then be subtracted from this $2 profit to calculate the total return on this investment. If the stock price drops below the $3 strike price on the put then the investor may exercise the put and the person who sold it is forced to buy the investor's 100 shares at $3. The investor loses $2 on the stock but can lose only $2 (plus fees) no matter how low the price of the stock goes. For example, if the stock price falls to $1 then the investor exercises the put and has a $2 gain. The value of the investor's stock has fallen by $5 – $1 = $4. The call expires worthless (since the buyer does not exercise it) and the total net loss is $2 – $4 = −$2. The premium received for the call must then be added to reduce this $2 loss to calculate the total return on this investment. If the stock price is between the two strike prices on the expiry date, both options expire unexercised and the investor is left with the 100 shares whose value is that stock price (×100), plus the cash gained from selling the call option, minus the price paid to buy the put option, minus fees. One source of risk is counterparty risk. If the stock price expires below the $3 floor then the counterparty may default on the put contract, thus creating the potential for losses up to the full value of the stock (plus fees). Interest Rate Collar Structure In an interest rate collar, the investor seeks to limit exposure to changing interest rates and at the same time lower its net premium obligations. Hence, the investor goes long on the cap (floor) that will save it money for a strike of