Sale with repurchase agreement

economic-dictionary

The sale with a repurchase agreement is a type of financial operation that involves two parties, one party that seeks financing and, therefore, liquidity, and another party that wishes to make its capital profitable through its loan.

In this type of operations we can include repos and simultaneous operations, which are operations with a short-term repurchase agreement, generally between 3 days and 180 days.

In this operation, the person selling an asset, be it fixed income or variable income, gives up that asset in exchange for liquidity, committing to repurchase it in the future at an additional cost. On the other hand, the person who offers that liquidity and receives that asset, will charge a financing cost (as we have just mentioned) and will obtain a profit or a loss as a result of the variation in the price of that asset during the contracted period. . This person may demand additional guarantees as a consequence of the variation in the price of that asset.

Transaction with repurchase agreement: «El REPO»

The repo market is a tremendously active market where financial entities move large amounts of money, because they are short-term assets, with great liquidity and security in their transactions. Therefore, it is the most important asset traded by the treasury desks of large banks because the risk is small.

Traders seek to attack the price or profitability with their broker. It is very common to say 10,000,000 euros at 111, this means a bid of 10,000,000 euros at a return of 0.111 to "X" days. The broker will try to cross this profitability with the counterparty with another client that may be from another fellow broker.

Sometimes, there are errors in the crossings because they are heard and it may be that the operations with the clients (large banks) are confirmed by the two brokers and there is a misunderstanding. In this way, the part in which there has been a misunderstanding must be corrected, it will be the ability of the broker who has erred and his contacts to place that repo for the pending capital. Generally, they tend to call the treasury desks of large banks and place it without major problems.

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Differences between repos and simultaneous

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