Haircut (finance)

Haircut (finance)

In finance, a haircut is a percentage that is subtracted from the market value of an asset that is being used as collateral. The size of the haircut reflects the perceived risk associated with holding the asset. However, the lender has a lien for the entirety of the asset.

For example, United States Treasury bills, which are seen as fairly safe, might have a haircut of 10%, while for stock options, which are seen as highly risky, the haircut might be as high as 30%. In other words, a $1000 treasury bill will be accepted as collateral for a $900 loan, while a $1000 stock option might only allow a $700 loan.

Lower haircuts allow for more leverage. Haircut has an important role on many kinds of trades, for example for Repo or Reverse Repo.