A repurchase contract (repo) is a short-term guaranteed loan: one party sells securities to a different and agrees to repurchase those securities later on at a greater cost. The securities act as collateral. The difference between the securities’ initial cost and their repurchase cost could be the interest paid from the loan, referred to as repo price.
A reverse repurchase agreement (reverse repo) may be the mirror of a repo deal. In a reverse repo, one celebration acquisitions securities and agrees to offer them right straight right back for an optimistic return at a later time, usually when the overnight. Many repos are instantly, though they could be much much much longer.
The repo market is essential for at the least two reasons:
- The repo market permits finance institutions that have plenty of securities ( e.g. Banking institutions, broker-dealers, hedge funds) to borrow cheaply and enables events with a lot of free money ( e.g. Cash market mutual funds) to make a tiny return on that money with very little danger, because securities, usually U.S. Treasury securities, serve as collateral. Banking institutions don’t want to hold money since it is expensive—it doesn’t pay interest. As an example, hedge funds hold plenty of assets but may require cash to fund day-to-day trades, so that they borrow from cash market funds with a lot of money, which could make a return without using much danger. อ่านเพิ่มเติม “What’s the repo market, and exactly why does it matter?”