What is the primary objective of an interest rate collar?

The primary objective of an interest rate collar is to provide stability in variable interest rates. An interest rate collar is a hedging strategy used by borrowers and investors to limit exposure to fluctuations in interest rates. It typically involves the use of a combination of interest rate caps and floors, which effectively set upper and lower bounds on the interest rate payments.

By establishing these bounds, the borrower can protect themselves from rising interest rates (by having a cap) while still benefiting from lower rates (up to a certain point, set by the floor). This mechanism enables borrowers to manage their interest expenses more predictably, fostering financial stability and planning. As a result, the primary goal is to ensure that interest rates remain within a manageable range, avoiding extreme costs associated with variable interest rate fluctuations.

Other options may relate to different financial strategies, such as speculation or trading, but their focus differs from the primary aim of the collar, which is centered around stability in interest expenses rather than profit maximization or risk minimization associated with counterparties.