What Is A Repurchase Agreement (Repo)?

Want To Raise Cash? Understand How One Of The Most Famous Financial Transactions Work

The market of repurchase agreements trades is growing. Furthermore, repurchase agreements have become one of the key sources of funding for proprietary desks and hedge funds. Hence, it is important to understand how repurchase agreements work.

This article aims to document the basic information on the repurchase agreement (repo) trades.

Repurchase Agreements Are Also Known As Repos

Article Aim

It will help us understand the following key points:

1. What are repos and what are their benefits?
2. What are the important properties of repo products?
3. How do we price repos?

1. What Is A Repo?

Let’s understand the reason why one would need to enter into a repo agreement:

1.1 Understanding The problem

Let’s consider that a bank A wants to raise cash today.

Bank A wants to invest this amount into a business and hopes to return the cash tomorrow. It can enter in an agreement with a…