what is hair cut rate ?

Question

related to money market

Answer 1

The term haircut comes from the fact that market makers can trade at such a thin spread. 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. Here are two examples for you-


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.

Please let me know if you need any more information, before you choose the best answer!

Answer 2

In finance, a haircut is a percentage that is subtracted from the market value of the assets that are being used as collateral. The size of the haircut reflects the perceived riskiness associated with the assets.

For example, Treasury bills (which are seen as fairly safe) might have a haircut of 1%, while for a stock option (which are seen as less safe) the haircut might be as high as 30%.


ECB use of haircuts
The European Central Bank (ECB) applies a haircut to all securities offered as collateral. The size of the haircut depends on the riskiness of the security offered as collateral. See the ECB Risk control framework


LTCM and haircut fees
LTCM was able to obtain practically next-to-zero haircuts, as it was considered safe by its lenders. This was likely due to LTCM’s clout and the fact that no counterparty had a total picture of the extent of its operations (Jorion (1999))

Answer 3

when broker dealers calculate their net asset value, as they are required to do each month, each asset they own is subject to a deduction from its value, called a 'hair cut'. the 'hair cut' varies by the type of asset held, and for other factors such as concentration and the age of receivables.