A repurchase contract (repo) is really a short-term guaranteed loan: one celebration offers securities to a different and agrees to repurchase those securities later on at a greater cost. The securities act as security. The essential difference between the securities’ initial cost and their repurchase cost may be the interest compensated in the loan, referred to as repo price.
A reverse repurchase agreement (reverse repo) may be the mirror of the repo transaction. In a reverse repo, one celebration acquisitions securities and agrees to market them straight straight back for a confident return later on, frequently when the following day. Many repos are instantly, though they may be much longer.
The repo market is essential for at the least two reasons:
- The repo market enables institutions that are financial possess plenty of securities ( e.g. (more…)