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A commodity collar is a transaction in which a client buys an option with the right to buy (or the right to sell) the agreed quantity of a specified commodity for the agreed strike price and, concurrently, sells the bank an option with the right to sell (or the right to buy) the same commodity at another strike price. The strike prices of the two options are normally selected so as to ensure a zero cost hedging structure for the client or so as to ensure that the premium for the option sold compensates the premium for the option bought in full extent.
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