Reverse Repurchase Agreement Is Also Referred To As

In a repo, the investor/lender makes money available to a borrower, with the loan secured by the borrower`s guarantees, usually bonds. In case of default of the borrower, the investor/lender receives the guarantees. Investors are usually financial firms such as money market funds, while borrowers are not custodian financial institutions such as investment banks and hedge funds. The investor/lender calculates an interest rate called the ”repo rate”, gives $X and recovers a higher amount, $Y. In addition, the investor/lender may require guarantees in excess of the amount he lends. This difference is the haircut. These concepts are illustrated in the diagram and in the Equations section. If investors perceive greater risks, they may demand higher repo rates and demand larger haircuts. A third party may be involved to facilitate the transaction; In this case, the transaction is called ”tri-repo”. [3] If the Federal Reserve is one of the parties to the transaction, rp is called a ”system repo,” but when acting on behalf of a client (for example. B of a foreign central bank), it is called a ”client repo”. Until 2003, the Fed did not use the term ”Reverse Repo” – which it believed was lending money (contrary to its charter) – but rather the term ”matched sale”.

A repurchase agreement (PR) is a short-term loan in which both parties agree to the sale and future redemption of assets within a specified period of time. The seller sells a Treasury bill or other government security guard with the promise to buy it back at some point and at a price that includes an interest payment. There is also a risk that the securities in question will be amortized before the maturity date, in which case the lender may lose money in the transaction. This time risk is the reason why the shortest trades during redemptions generate the most favorable returns. A sell/buyback is the cash sale and redemption at the front of a security. These are two separate direct spot market transactions, one for futures settlement. The futures price is set in relation to the spot price in order to obtain a return on the market. The fundamental motivation for sales/redemptions is usually the same as for a classic repo (i.e.: The attempt to take advantage of the lower funding rates generally available for secured loans compared to unsecured loans). The profitability of the operation is also similar, with interest on the money borrowed by the sale/redemption implicitly in the difference between the sale price and the purchase price. . . .

This entry was posted in Okategoriserade. Bookmark the permalink.