It is a forward contract in which one counterparty (the long) buys an out-of-the-money put option and sells an out-of-the-money call option (both form the collar). As such, the received premium from selling the call option is used to pay for the put option. That means the two premiums cancel each other out, and the net cost of this strategy is virtually zero. The collar is established on upside and downside movements in the underlying price, and therefore movements are limited to the area between the two exercise prices of the options.

The impact forward is also referred to as an collared forward.