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Learn about the following:
How repo works. The terms used in repo transactions. The repo rate and why it changes. The risks of doing repo. How some risks can be reduced. How repo trades can be used.
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1. How repo works
2. The repo rate
3. Repo is not risk free
4. How repo is used
5. Summary
6. Test
19th February 2010
A buy/sell back is a spot sale of a security with a simultaneous forward purchase. Buy/sell backs are sometimes used instead of repo transactions. The main difference between the two structures is that in a repo, the repo rate is used to determine the sum of money that is repaid at maturity. In a buy/sell back the deal is quoted as a spot and forward security price. The actual collateral amounts and cash payments are the same in both structures. Here is an example:
15th September 2009
Forward rate agreements (FRAs) are contracts for difference. They are traded in the over-the-counter (bilateral or non-exchange) market. They allow the two parties involved to hedge or speculate on interest rates in the future. Perhaps the easiest way to understand a FRA is to break it down into a loan and deposit. Let's try.
15th February 2010
A repo involves two parties. One party, (the seller), gives collateral, normally bonds, to the other party, (the buyer). In return the buyer pays a cash amount to the seller. The cash amount involved is based on the market price of the collateral plus its accrued interest. The seller does a repo, the buyer a reverse repo: