Cash Repurchase Agreement Definition

In determining the true cost and benefits of a repo transaction, a buyer or seller wishing to participate in the transaction must take into account three different calculations: when public central banks buy securities from private banks, they do so at a reduced interest rate called « repo ». Like policy rates, repo rates are set by central banks. The repo interest rate system allows governments to control the money supply within economies by increasing or reducing available resources. A cut in repo rates encourages banks to sell securities for cash to the government. This increases the money supply available to the general economy. Conversely, by raising repo rates, central banks can effectively reduce the money supply by preventing banks from reselling these securities. An open repo transaction (also known as a repo on demand) operates in the same way as a term repo, except that the trader and the counterparty accept the transaction without setting the maturity date. On the contrary, both parties can terminate the trade by informing the other party before an agreed daily deadline. If an open repo is not completed, it is automatically overwritten every day. Interest is paid monthly and the interest rate is regularly reassessed by mutual agreement.

The interest rate on an open repo is usually close to the federal funds rate. An open repo is used to invest cash or to fund assets if the parties don`t know how long it takes them. But almost all ongoing agreements will be concluded within a year or two. Rests are popular because they are simple and safe. Financial institutions such as banks, securities dealers and hedge funds do not like to have large amounts of cash. They prefer to put all their money into the work. If they need cash in a hurry, they can turn to the repo market. In contrast, MONEY MARKET FUNDS have a lot of cash. They are happy to lend money to the financial institution overnight for a small fee. Financial Services Inc., an investment bank, wants to find some money to cover its operations.

He works with cash`n` Capital Bank to buy $1 million…