a. Repurchase agreements or REPOs are the major mechanisms through which the central bank of any country performs its open market operations to manage its target interbank rates.
b. It refers to the sale of a security with an agreement to buy back at a future date at an agreed-upon price.
c. The repay price of the loan is the original principal plus the interest at the repo rate. Thus,
Repurchase Price = Original Loan × (1 + REPO Rate) |
d. If the term of the agreement is one day, then it is called an ‘overnight REPO’. However, if the term of the agreement is more than that, it is called a ‘term REPO’.
e. If on a contrary, there is an agreement to borrow the security, which would be sold at a later date, then such an agreement is called a ‘Reverse REPO’.
f. There is a credit risk involved in such lending, thus this loan is generally securitized. The number of funds lent is generally less than the value of the security, and the difference between the amount lent and security held is called the ‘REPO Margin’.