What is hair cutting

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Usage explanations of natural written and spoken English. Grammar Thesaurus. Word Lists. Choose your language. My word lists. Tell us about this example sentence:. The word in the example sentence does not match the entry word. The sentence contains offensive content. Formulas that reduce the value of any given security based on its class, market risk, or maturity date.

Haircuts come into play when the borrowers become unable to make payments or repay the loan or when companies value the securities they hold. The act of cutting of the hair, often done professionally by a barber , hair stylist, or beautician. The way hair is cut. A cutting or clipping of the hair of the head. First Known Use of haircut , in the meaning defined at sense 1. Buying Guide Our team at The Usage has selected the best hair straightener of Learn More About haircut.

Time Traveler for haircut The first known use of haircut was in See more words from the same year. From the Editors at Merriam-Webster. We Added New Words to the Dictionary in Style: MLA. English Language Learners Definition of haircut. Kids Definition of haircut. Get Word of the Day daily email! Test Your Vocabulary. Develop and improve products. List of Partners vendors.

A haircut has two meanings. The term haircut is most commonly used when referencing the percentage difference between an asset's market value and the amount that can be used as collateral for a loan.

There is a difference between these values because market prices change over time, which the lender needs to accommodate for. The term is less commonly used as the market maker's spread. The term haircut is used since the market maker's spreads are so thin. A haircut refers to the lower-than-market value placed on an asset being used as collateral for a loan.

The haircut is expressed as a percentage of the markdown between the two values. When they are used as collateral, securities are generally devalued, since a cushion is required by the lending parties in case the market value falls. When collateral is being pledged, the degree of the haircut is determined by the amount of associated risk to the lender. These risks include any variables that may affect the value of the collateral in the event that the lender has to sell the security due to a loan default by the borrower.

Variables that may influence that amount of a haircut include price, volatility, credit quality of the asset's issuer if applicable , and liquidity risks of the collateral. Generally speaking, price predictability and lower associated risks result in compressed haircuts, as the lender has a high degree of certainty that the full amount of the loan can be covered if the collateral must be liquidated.

For example, Treasury bills are often used as collateral for overnight borrowing arrangements between government securities dealers, which are referred to as repurchase agreements repos.

In these arrangements, haircuts are negligible due to the high degree of certainty on the value, credit quality, and liquidity of the security. Securities that are characterized by volatility and price uncertainty have larger haircuts when used as collateral. Penny stocks , which pose potential price, volatility and liquidity risks, typically cannot be used as collateral in margin accounts.

A haircut is also sometimes referred to as the market maker's spread. Since market makers can transact with razor-thin spreads and low transaction costs they can take small slivers or haircuts of profits or losses constantly throughout the day.