Saturday, August 25, 2007


A term used to describe the amount of leverage allowed in a reverse repo transaction. For example, if the haircut on a corporate bond is 10%, that means the owner of the corporate bond can borrow 90% of the purchase price. Put another way, the buyer can get 10x leverage on the position.

The amount of haircut is generally a function of the credit quality and duration of the bond. In addition, the haircut is often negotiated by the borrower, which means that a dealer's better customers may be afforded lower haircuts. Long Term Capital Management infamously negotiate extremely low haircuts on their transactions.

No comments: