How Is the “Haircut” Applied to Collateral in Risk Calculation?

A haircut is a percentage reduction applied to the market value of an asset when it is used as collateral. This reduction accounts for potential price volatility and the liquidity risk of the asset.

For example, a 10% haircut means a $100 asset is only valued at $90 for collateral purposes, providing a necessary safety buffer against adverse market fluctuations.