Haircut

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DEFINITION of '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.

BREAKING DOWN 'Haircut'

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.

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RELATED FAQS
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