In its simplest form, a repurchase transaction is a secured loan that involves a contractual agreement between two parties, committing to sell a security at a certain price, with an obligation to subsequently redeem the security at another specified price. In essence, a retirement transaction is therefore similar to a short-term interest rate loan against certain guarantees. Both parties, the borrower and the lender, are able to meet their investment objectives in terms of financing and secured liquidity. For traders in trading companies, deposits are used to finance long positions, to have access to more advantageous financing costs for other speculative investments and to hedge short positions in securities. The redemption and redemption upside down of the contract are fixed and agreed at the beginning of the operation. Retreats are usually short-term transactions, often literally overnight. However, some contracts are open and do not have a fixed expiry date, but the reverse transaction is usually done within one year. 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 current contracts are concluded within one to two years. In the case of a repurchase agreement, the lender is exposed to the risk that the borrower will not buy back the securities. If the borrower does not redeem the securities within the agreed timeframes, the lender may sell the securities on the market, but often, to mitigate this risk, the borrower will offer collateral in the form of securities. Deposits with a given maturity date (usually the next day or week) are long-term retirement operations. A trader sells securities to a counterparty with the agreement that he buys them back at a higher price at a given time. In this agreement, the counterparty receives the use of the securities during the term of the transaction and receives interest which is expressed as the difference between the initial sale price and the redemption price. The interest rate is set and the interest is paid at maturity by the merchant. A term repo is used to invest cash or to fund assets if the parties know how long it takes them. A repo is a form of short-term borrowing for government bond traders. In the case of a repo, a trader sells government bonds to investors, usually overnight, and buys them back the next day at a slightly higher price.
This small price difference is the implicit overnight rate. Deposits are usually used to raise short-term capital. They are also a common instrument for central banks` open market operations. .