Repurchase - Repurchase A form of short-term borrowing for...

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Repurchase A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day. For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement. A repurchase agreement (or repo ) is an agreement between two parties whereby one party sells the other a security at a specified price with a commitment to buy the security back at a later date for another specified price. Most repos are overnight transactions, with the sale taking place one day and being reversed the next day. Long-term repos—called term repos —can extend for a month or more. Usually, repos are for a fixed period of time, but open-ended deals are also possible. Reverse repo is a term used to describe the opposite side of a repo transaction. The party who sells and later repurchases a security is said to perform a repo. The other party—who purchases and later resells the security—is said to perform a reverse repo. While a repo is legally the sale and subsequent repurchase of a security, its economic effect is that of a secured loan . Economically, the party purchasing the security makes funds available to the seller and holds the security as collateral . If the repoed security pays a dividend , coupon or partial redemptions during the repo, this is returned to the original owner. The difference between the sale and repurchase prices paid for the security represent interest on the loan. Indeed, repos are quoted as interest rates. Securities dealers use repos to finance their securities inventories. They repo their inventories, rolling the repos from one day to the next. Counterparties may be institutions, such as money market funds, who have short-term funds to invest, or they may be parties who wish to briefly obtain use of a particular security. For example, a party may want to sell the security short, or they may need to deliver the security to settle a trade with another party. Accordingly, there are two possible motives for entering into a reverse repo: short-term investment of funds, or to obtain temporary use of a particular security. In the latter case, the security is called a special security . In the former case, it is called general collateral or GC. Interest rates payable on special repos tend to be lower than those payable on GC repos. This is because a party reverse repoing a special security will accept a reduced interest rate on its funds in exchange for receiving the special security it requires. Economically, the transaction is no
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This note was uploaded on 02/01/2011 for the course CAS 90589 taught by Professor Prof.deleon during the Winter '10 term at University of the East, Manila.

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Repurchase - Repurchase A form of short-term borrowing for...

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