A hedging strategy that combines the purchase of a protective put option with the sale of a call option on the same underlying asset, typically with the same expiration date but different strike prices. The premium received from the sold call offsets the cost of the purchased put, resulting in minimal or no net premium outlay, hence the term “zero-cost.” 

This structure provides downside protection while capping upside potential, making it ideal for companies looking to lock in a favorable range of exchange rates without incurring high hedging costs. It is commonly used in foreign exchange hedging to manage exposure to currency fluctuations. 

For example, a company expecting to receive EUR in three months might enter into a zero-cost collar by buying a EUR put (to protect against depreciation) and selling a EUR call (which limits gains if the euro appreciates). This sets a protective floor and a participation ceiling, defining a range within which the company will effectively transact. 

Zero-cost collars are attractive for budget-conscious risk management, especially in low-volatility environments. However, they limit potential gains and require careful selection of strike levels to balance risk and reward. This strategy is often used as part of a broader treasury risk framework to achieve certainty in cash flow forecasts while avoiding upfront option premiums.