# Liquidity premium

A fear that the market won’t be there. It is fundamental to understand that the market cannot be assumed. It is not a free good. The price I have to pay for using the market is the liquidity premium. That is why collateralized assets are valued always “at a haircut”. Collateralization is the process by which some asset is pledged as security for the non-performance of a debt contract. In relation to collateralization, *risk* is the real possibility that the value of an asset may change, either up or down, in the future. *Haircut* is the difference between an asset’s present asking price in the market and the price at which it is valued for the purposes of collateralization and in light of its risk; or, in other words, the difference between the price at which it can be currently liquidated and the value at which it can be borrowed against. See Dealer function.