Repurchase agreement

Categories:

Finance

| Contributor:

Hoang Truong

Tags:

Business Process

Definition

Repurchase agreement (Repo) is when party A sells an asset (usually fixed-income securities) to another party at one price and commits to repurchase the same from the party at a different price at a future date or (in the case of an open repo) on demand. If the seller defaults during the life of the repo, the party can sell the asset to a third party to offset his loss. The asset therefore acts as collateral and mitigates the credit risk that the buyer has on the seller.

‍

Example

An investment company and currently need money to make a quick investment on a new trade of corn for 2 weeks but it has problem with short amount of cash. However, the company currently own a lot of 10 years US-treasury bonds that it has purchased before. So it comes up with a repo to get quick cash for the trade

Go to another firm(Firm B), ask if they can issue a repo of $10,000 and the investment company will put $10,000 of bond as collateral. The investment company will repurchase the bond later in 2 weeks at 10,500
The investment company use the $10000 to invest in its corn trade, make a profit of $2000
After 2 weeks, the investment company come back and repurchase the bond at 10,500 from firm B

Video

Visualization(click to expand)

Source and advanced materials

Edlintics is trying give you the best content!! Send us what you want to learn and we will explain for FREE!!

Tell us what you want to simplify!!!

Repurchase agreement

Definition

Example

Source and advanced materials

If you think you can simplify the concept further, tell us!!

Sign up and learn new business concept every week!!!

Company

Contact