Free lesson · Arbitrage

Haircuts and survival capital

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A balanced hedge can need cash in one account before its offsetting gain is available in another.

A haircut is the part of eligible collateral value the lender does not advance. Add variation-margin reserves and operational cash to obtain a capital budget.

Stress each account and settlement deadline. A haircut increase consumes cash even at unchanged asset prices; sale of collateral may break the original hedge.

Apply it in a strategy

• Size basis trades by stressed liquidity rather than terminal profit alone.
• Record the input timestamp, executable quantity, currency and horizon. Reconcile the result with a cash-flow or state table.
• Stress this failure condition: Positive total equity does not ensure a particular margin account can meet its immediate demand.

Research deliverable

Build and explain a haircuts and survival capital worksheet. Size basis trades by stressed liquidity rather than terminal profit alone.

Evidence boundary: Synthetic arithmetic and scenarios illustrate mechanics. They are not historical returns, a paper replication, or evidence of an executable edge. Research sources and their access limitations are recorded at the end of this module.

# Python 3.10+; standard library unless NumPy is imported below.
# Inputs and outputs use the units defined in this lesson. Synthetic teaching example.
def capital(value,haircut,margin,buffer):
    if value<0 or not 0<=haircut<=1 or min(margin,buffer)<0: raise ValueError("Invalid collateral inputs")
    return haircut*value+margin+buffer

print(capital(100000,.18,12000,5000))