re: The Lesson of Oil

Please take my extremely unqualified opinion with a grain of salt. If anyone disagrees please call me out.

I say that because yield spreads over Treasurys (which is often the baseline) have widened because there has been a significant selloff among institutional investors of high yield debt. The fact that over 20% of applicable issuers is under severe pressure means that high yield debt in general is going to be weighed down in the short term, regardless of whether or not that's justified.

Cost of capital is derived from 2 elements: cost of debt and cost of equity. A major impetus for quantitative easing and keeping rates low in general is that it makes the economy's cost of capital lower.

One disclaimer, I was probably remiss to say "everyone". This really won't apply to companies that don't need access to hy debt, aka large caps, blue chippers, etc.

Re 3 way collars, derivatives aren't really my area of expertise (but then again nothing is), but in very broad terms, it's when firms take on additional downside risk to try to offset the cost of hedging under the premise that there's basically no way oil drops below 70, 60 etc. They aren't completely naked but there is a lot of risk to cash flows, which increases default risk.