Buzzword of the Week: Haircut

If you look up at my picture, you’ll see that my hair is on the thin side, although I have more than my fellow partners Jeff Whipple and Paul Zambrotta. That’s why I was fascinated when I ran across a reference to a “financial haircut.”

Going to my ever-trusty source, Investopedia, here’s what I found as an explanation:

A haircut is used to describe either:

1. The difference between prices at which a market maker can buy and sell a security. The term haircut comes from the fact that market makers can trade at such a thin spread.

2. The percentage by which an asset’s market value is reduced for the purpose of calculating capital requirement, margin and collateral levels. 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.

photo credit: The Haircut via photopin (license)

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