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.

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