Equity Derivatives and Structured Products Glossary: Repo agreement


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Repo agreement

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Repo agreement

Repo agreement

To buy (sell) a Security while at the same time agreeing to sell (buy) the same Security at a predetermined Future date. The price at which the reverse transaction takes place sets the Interest rate over the period (the Repo rate). The most active REPO market is in the US, where the Federal Reserve sets Short-term Interest rates by lending securities. In a reverse REPO the buyer sells Cash in Exchange for a Security. Repos can benefit both parties. Buyers of repos often receive a better return than that available on equivalent money-market instruments; and financial institutions, particularly dealers, are able to get sub-Libor funding. A slight variation on the REPO is the buy/sell back. The buy/sell back’s Coupon becomes the property of the purchaser for the duration of the agreement. It is preferred by credit-sensitive investors such as central banks.

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