ACCOUNTING FOR INTEREST RATE REVERSE COLLAR
Accounting for an interest rate reverse collar is very similar to that of accounting for a collar instrument. In the reverse collar there are two components: the cap component and the floor component. Depending upon the strike rates of cap and floor the premium is computed. In a reverse collar, if the benchmark rate is above the cap rate on the reset date, then on the pay date interest above the cap strike rate will be paid by the buyer of the reverse collar instrument to the seller. If the benchmark rate is lower than the floor rate then the seller compensates the buyer interest to that extent.
Just as in a collar instrument, in a reverse collar the premium can be either positive or zero. It can also be negative, meaning that the buyer of the reverse collar may get a premium for taking a position.
Get Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
