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Repurchase agreement

| Contributor:
Hoang Truong
Business Process


Repurchase agreement (Repo) is when party A sells an asset (usually fixed-income securities) to another party at one price and commits to repurchase the same from the party at a different price at a future date or (in the case of an open repo) on demand. If the seller defaults during the life of the repo, the party can sell the asset to a third party to offset his loss. The asset therefore acts as collateral and mitigates the credit risk that the buyer has on the seller.


An investment company and currently need money to make a quick investment on a new trade of corn for 2 weeks but it has problem with short amount of cash. However, the company currently own a lot of 10 years US-treasury bonds that it has purchased before. So it comes up with a repo to get quick cash for the trade

  • Go to another firm(Firm B), ask if they can issue a repo of $10,000 and the investment company will put $10,000 of bond as collateral. The investment company will repurchase the bond later in 2 weeks at 10,500
  • The investment company use the $10000 to invest in its corn trade, make a profit of $2000
  • After 2 weeks, the investment company come back and repurchase the bond at 10,500 from firm B

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