A reduction applied to the value of collateral to allow for its price falling before it can be sold. Riskier or less liquid assets take larger haircuts.
Where you will meet it
Haircut comes up in 45 learning outcome notes across the FRM syllabus.
A few of them:
Exchanges and OTC Markets FRM Part I · Financial markets and products
“Calls are met in cash or in eligible securities valued after a haircut.”
Anatomy of the Great Financial Crisis of 2007-2009 FRM Part I · Foundations of risk management
“A repo haircut is the cash not lent against collateral.”
Country Risk: Determinants, Measures, and Implications FRM Part I · Valuation and risk models
“The outcome is a negotiated restructuring in which they accept a haircut, longer maturities or lower coupons.”
Country Risk: Determinants, Measures, and Implications FRM Part II · Credit risk measurement and management
“A sovereign cannot be liquidated, so default is followed by a negotiated restructuring in which creditors accept an exchange, longer maturities or lower coupons, a loss often called a haircut.”
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