Kanvi Media buys Rashmik Studios for Rs 500 crore in Kanvi shares with a collar between Rs 180 and Rs 220. How many shares are issued, and what do Rashmik's holders receive, if Kanvi closes at Rs 160, Rs 200 and Rs 240?

At Rs 200 Kanvi issues 2.500 crore shares worth Rs 500 crore; at Rs 160 the count is frozen at 2.778 crore, worth Rs 444.4 crore; at Rs 240 it is frozen at 2.273 crore, worth Rs 545.5 crore. Rashmik's holders end up with 12.2%, 11.1% and 10.2% of Kanvi. Inside the collar Kanvi bears the price risk by issuing more or fewer shares; outside it the risk passes back to Rashmik, which is why Rashmik also holds a walk-away right below Rs 150.

Agree to sell your car for 'whatever Rs 5 lakh of gold is worth on delivery day' and you have taken gold price risk until then. Agree instead on 'a fixed weight of gold' and the buyer has taken it. A share deal has the same choice: a fixed exchange ratio puts the risk of the buyer's share price on the seller, a fixed value puts it on the buyer, and a collar splits the band between them. Kanvi's collar fixes the value at Rs 500 crore while its price sits between Rs 180 and Rs 220: the share count floats, 500 crore divided by the price, from 2.778 crore at the bottom to 2.273 crore at the top. At the edges the count stops moving and the deal turns into a fixed-ratio deal, so beyond them the value floats with the price again.

At Rs 200, inside the collar, Kanvi issues Rs 500 crore over Rs 200, 2.500 crore shares, worth Rs 500 crore. Rashmik's holders own 2.5 over 22.5, 11.1% of the combined company. At Rs 160, below the collar, the count is the one Rs 500 crore bought at Rs 180: 2.778 crore shares, now worth Rs 444.4 crore, 11.1% below the headline, and a 12.2% stake. At Rs 240, above the collar, the count is frozen at 2.273 crore, worth Rs 545.5 crore, 9.1% above the headline, and the stake falls to 10.2%. The value Rashmik receives is a flat line between the collar edges with a slope on either side; the stake it receives moves the other way, highest when Kanvi's shares are cheapest.

Inside the band, Kanvi bears it. If its price slips from Rs 200 to Rs 180 it hands over 2.778 crore shares instead of 2.5 crore, 0.278 crore more, about Rs 56 crore of extra value at the signing price, and Kanvi's own holders are diluted to pay for a fall in their own stock. Outside the band, Rashmik bears it: below Rs 180 it holds a fixed number of shares that fall with the price, which is why it negotiated the right to walk away below Rs 150, where it would receive only Rs 417 crore. Kanvi agrees to the floor because it caps the number of shares it can be forced to issue, and so the maximum dilution: 12.2% at worst. Rashmik agrees to the ceiling because above Rs 220 it keeps the upside of a fixed count, 545.5 crore at Rs 240.

The structure is a pair of options and can be priced as one: Rashmik holds a put on Kanvi's shares struck at Rs 180 on 2.5 crore shares and has written a call struck at Rs 220, roughly, and a wider collar is worth more to the seller and costs the buyer more in potential dilution. Interviewers follow with the twenty-day average: it stops a single bad day from setting the ratio, but it also means the price used can differ from the price on closing day, so a seller receiving shares in a falling stock gets fewer rupees than the formula says. The limit of the three-price answer is that it ignores the deal's own effect on Kanvi's price; a market that dislikes the acquisition pushes the stock towards the floor, which is exactly where Rashmik's walk-away right matters.