A firm is expecting to receive $80M in 6 months and wishes to invest it for another 6 months. But the firm is worried about a potential decline in interest rates. Because of their flexibility, the firm decides to use call options on the 6-month T-bill. A call option on the 6-month T-bill with 6-month maturity exists with strike $95.8 (per $100 face value) and $0.34 premium. The current price of the 6-month T-bill is $96.92 per 100 face value.

Assume the firm thinks the initial cost of call options is too high. The firm considers alternatives to reduce the hedging costs. Discuss how the firms could reduce hedging costs through a collar. Assume there is a put option on the 6-month T-bill with 6-month maturity and a strike price of $94.00 (per $100 face value) and $0.20 premium. Draw the payoff diagram for the collar.