Collar

A collar is the negotiated middle between a fixed ratio and a fixed value. Which risk it removes depends on which structure it sits on top of, and the interviewer's follow up is usually which side it is protecting.

On a fixed ratio deal the ratio holds while the acquirer's price stays inside the band. Below the floor the ratio steps up so the target still receives the value the floor implies, and above the ceiling it steps down. The target has bought a floor on value and normally pays for it by giving up upside at the other end.

On a fixed value deal the collar runs the other way. The value holds inside the band, and outside it the ratio is capped, so the acquirer's dilution stops growing and the target carries the risk beyond that point.

The exposure it addresses is a function of two things only: the length of the gap between signing and completion, and the volatility of the acquirer's shares. A collar is worth its complexity when both are large, which in practice means a regulator heavy deal with a volatile acquirer.

Be honest about frequency. Collars are used far less than the logic suggests, because they complicate the announcement, hand the market two price levels to trade around, and most target boards would rather bank a slightly better ratio. A collar reshapes the payoff; a walk away right changes whether the deal happens at all, and that is often the more valuable protection.