Repos
Repo is short for "repurchase agreement". Those who deal in
government securities use repos as a form of overnight borrowing.
A dealer or other holder of government securities (usually
T-bills) sells the securities to a lender and agrees to repurchase
them at an agreed future date at an agreed price. They are
usually very short-term, from overnight to 30 days or more.
This short-term maturity and government backing means repos
provide lenders with extremely low risk.
Repos are popular because they can virtually eliminate credit
problems. Unfortunately, a number of significant losses over
the years from fraudulent dealers suggest that lenders in
this market have not always checked their collateralization
closely enough.
There are also variations on standard repos:
- Reverse Repo - the
opposite of a repo, where a dealer buys government
securities from an investor and then sells them back
on a later date at a higher price.
- Term Repo -
the same as a repo except the term of the loan is
greater than 30 days.
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