Margin computation is an integral part of collateral business in Security finance. There are many different security products that requires accurately computing margin for covering counter party risks. This also means that identifying a collateral that it’s market value is correctly set and “Hair Cut” value is correct identified for the worst case scenarios.
There are one in a life time events like year 2008 financial crisis; however, one must compute the value accurately to ensure that counter party risks are properly covered for such an event.
Following are few good reads on how Hair Cut is defined and computed for each type fo collateral. Since Repo (Repurchase Agreement) business such an integral part of credit flow in financial market, having the margin properly set and computed a serious problem; thus must be computed with accuracy in mind.
- One in the market that traders seemed to use – http://www.dashfinancial.com
- EU economic forum’s documentation on the collateral https://www.ecb.europa.eu/paym/coll/coll/html/index.en.html
- A paper on The Leverage Cycle by a Stanford academic – https://web.stanford.edu/~piazzesi/Reading/Geanakoplos2009