what is financial hircuts?

Answer 1

Haircut
1. The difference between prices at which a market maker can buy and sell a security.

2. The percentage by which an asset's market value is reduced for the purpose of calculating capital requirement, margin, and collateral levels.

Notes:
1. The term haircut comes from the fact that market makers can trade at such a thin spread.

2. When they are used as collateral, securities will generally be devalued since a cushion is required by the lending parties in case the market value falls.

Answer 2

Bolan gave a good answer. I'd like to expand upon it.

Haircuts are common in the Repo Market. This is a market where financial institutions can borrow money short term. They can get good rates because they use securities as collateral.

For example, if I own $1,000,000 worth of the two year Treasury bond, I can enter into an agreement with you where I sell you the security now and agree to buy it back later. Technically, this is a sale and a purchase -- but realistically, I am borrowing money from you for a short period of time, and letting you hold on to my bond as security.

Now you might look at my two year bond and think "If interest rates rise, this will lose value -- so maybe he will walk away from the deal and I am stuck with this bond). As a consequence of this worry, you might compute how much the bond will be worth if this happens, and only lend me that amount of money. So, you might lend me $950,000 for this bond. You would be willing to lend me more for a bond that is less sensitive to interest rates, and less for one that is riskier. This difference is what is referred to as "the haircut."

This is a concept that might seem strange at first -- but that people are familiar with when they buy a home. Most banks will only lend you 80% of the value of the home you buy. Some will lend you 90%. The difference is to protect them. If they loaned you the entire value of your house and values fall, you could walk away and they are stuck with a loss. But if you have 20% equity in the house, even if values fall, you are likely to keep paying them -- since the house is worth something to you and more than the value of the mortgage. The downpayment you make on the house is equal to the haircut.

Answer 3

when u have a smaller amount of money.