What is collateral and haircut?

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Collateral is an asset pledged as security for a loan, while haircut is the percentage reduction in the value of the collateral.

Collateral is a form of security for a loan, which can be seized by the lender if the borrower defaults on the loan.
Haircut is the percentage reduction in the value of the collateral that the lender applies to account for market fluctuations and potential losses.
The higher the risk associated with the collateral, the higher the haircut applied by the lender.
For example, if a borrower pledges $10,000 worth of stocks as collateral for a loan, and the lender applies a 20% haircut, the effective value of the collateral would be $8,000.
Collateral and haircut are important concepts in financial markets, particularly in the context of margin trading and secured lending.

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