A repo is economically similar to a secured loan, with the buyer (effectively the lender or investor) receiving securities for collateral to protect himself against default by the seller. In a repo the party B acts as a lender of cash, whereas the seller A is acting as a borrower of cash, using the security as collateral in a reverse repo ( A) is the lender and ( B) the borrower. Structure and other terminology Ī reverse repo is a repo with the roles of A and B exchanged. The sole difference is that in (i) the asset is sold (and later re-purchased), whereas in (ii) the asset is instead pledged as a collateral for a loan: in the sell-and-buy-back transaction, the ownership and possession of S are transferred at t N from a A to B and in t F transferred back from B to A conversely, in the repo, only the possession is temporarily transferred to B whereas the ownership remains with A. The term repo has given rise to a lot of misunderstanding: there are two types of transactions with identical cash flows: (i) a sell-and-buy-back as well as, (ii) a collateralized borrowing. Repo expressed as mathematical formula Ī repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a transaction concluded on a deal date t D between two parties A and B: (i) A will on the near date tN can be interpreted as the interest rate for the period between near date and far date. The dealer sells the underlying security to investors and buys them back shortly afterwards, usually the following day, at a slightly higher price. A repurchase agreement, also known as a repo, is a form of short-term borrowing, mainly in government securities.
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