In finance, a haircut is an assumed reduction in the value of a security to account for the risk of its market value falling when the asset must be sold. In the case of a loan or a margined trade where a security is used as collateral, the lender may loan cash equal to the value of the asset after the haircut has been applied rather than the market value of the asset. This way, if there is a default and the lender has to sell the collateral, the lender can limit the risk of overall loss when the asset falls in value. The haircut is usually calculated based on the credit and liquidity risk of the asset.
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