An Interest Rate Collar (Collar) is an interest rate risk management tool that effectively creates a band within which the borrower’s variable interest rate will fluctuate, by combining an Interest Rate Cap with an Interest Rate Floor.

It provides the borrower with protection against adverse rate movements above the Cap “Strike” rate, but also incorporates a Floor, below which the borrower will not benefit from a potential fall in interest rates. The cost of the upfront premium payable by the borrower for the Cap is offset by the premium payable to the borrower for selling the Floor. Borrowers will often choose a Floor Strike rate that has an equal premium cost to the Cap they have chosen, providing them with a Zero Premium Collar when the premium payments are offset. 
 

A Collar allows you to tailor your risk management policy in relation to interest rate movements without affecting the underlying borrowing, and the cost (if any) is paid by way of an upfront premium. The premium costs for the Cap and Floor will be dictated by factors such as the Strike rate, the term and the rollover dates you have requested, but will also be impacted by market volatility. 
 

It is important to be aware that a Collar only affects the base interest rate applicable to your underlying lending facility (it is typically measured against EURIBOR or LIBOR). It has no effect on any acceptance or other fees and margins payable under that facility, and you remain obligated to pay those fees and margins regardless of any Interest Rate Collar arrangements. 
 

If you decide to terminate the Collar prior to the maturity date, this early termination may incur a break cost (associated with the Floor) which is calculated at the prevailing market interest rates at the time of the break. As these costs may be significant to you, you should consider this point carefully.
 

This information is intended as an introduction to this product and doesn’t fully explain the benefits and potential risks associated with this and derivative products in general. Your AIB Customer Treasury Services relationship manager will be happy to meet with you and discuss your requirements, and to explain the benefits and potential risks associated with each interest rate hedging product. You should seek your own independent advice on the legal and financial aspects prior to entering into any derivative transaction.

Talk to Us

We offer a range of products to manage Interest Rate risk, including the “Vanilla” ones outlined here to the more structured products which can be tailored to address your specific requirements. Please contact us and we will be happy to discuss all of these with you. 

Other Interest Rate Risk Management Products:

Interest Rate Swap

Specify your Interest Rate Swap (IRS) for protection against adverse interest rate movements.


Interest Rate Cap

Allows you to cap the interest rate costs on variable borrowings at the Strike rate.

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