What are Repurchase Agreements (Repos)?
Repurchase agreement (AKA Repo) A repo is the equivalent of a short term collateralized loan. The owner of a marketable security would sell these securities for cash - and then agree to purchase back the security at a later date, usually at a higher price than he/she sold it for. The spread between the two prices is equivalent to interest. These are used by institutions who look for quick easy ways to make additional cash with their current cash at little to no risk. So if a bank had a surplus cash of £1 million, it would buy a repo, put in x buyback date and pay y for this lending as it is the buyer. The owner of the securitised assets would be selling or borrowing the cash in exchange. y is considered the equivalent of interest. To avoid the risk of the seller being unable to buy back those assets repo agreements are usually collateralised with securities with a market value in excess of the amount paid for them. As a consequence of this agreement the goals of bo...