This paper examines the differences between pricing methods in the interest rate collar and the interest rate swap.
The collars are considered portfolios of interest rate options whereas the swaps are considered those of forward rate agreements(FRA). But the two financial derivatives have the same payoff mechanism at any settlement date. If the market is efficient, these two prices must be same or there exist arbitrage opportunities.
Whichever methods are used, our results show that there are no differences in swap prices at all swap rate. But when we calculate the prices of collar in the given cap rates, the floor rates that make cost free collar by Black model are higher than those rates by FRA model. So the floor rate of the collar by FRA model must be the minimum limit in collar contract.
