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What is the difference between Haircut and VAR margin?
A haircut refers to a reduction applied to the value of an asset, expressed as a percentage. For example, if an asset worth Rs 100 has a haircut of 20%, its effective value is considered to be Rs 80.
On the other hand, VAR margin (Value at Risk margin) measures the risk of a potential loss in the value of a share or portfolio, based on historical price trends and volatility. It indicates the probability of loss, typically over a one-day period. For example, if a stock has a 10% VAR margin requirement, it means there is a potential for a 10% loss in value within one day, with a certain level of confidence.
In summary, while a haircut reduces the value of an asset for collateral purposes, VAR margin assesses the risk of loss in value for trading purposes.
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