Schweser Vol1 2PM - Q 13.5 - UST as hot collateral

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发表于 2011-7-13 08:03 | 只看该作者

on the run treasuries are the newly issued securities, so they tend to be more liquid...that's why they're considered hot....when you use hot collateral in a repo, the dealer demands it more, so theyre willing to provide a lower repo rate.

I know we started a discussion on this not too long ago, any verdict on whether the above is correct?

thommo77

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发表于 2011-7-13 08:15 | 只看该作者

I guess I am not really questioning whether Schweser is correct or not in this case - presume they are.

I am obviously missing something wrt UST being hot. If it's the most liquid, easily available security, not something that's hard to get your hands on, then why would be considered hot?

Zestt

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发表于 2011-7-13 08:26 | 只看该作者

its not the repo dealer's job to get that security...It's considered hot because if you were to take out a repo loan, and you had the choice of giving him some crap collateral or more liquid collateral, he will prefer the latter. Hence, he should pay for this "hotter" security by lowering his rate for you.

thommo77

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发表于 2011-7-13 08:37 | 只看该作者

FYI, this question is in their errata (it's pretty evident when you read their answer).

bpdulog

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发表于 2011-7-13 08:48 | 只看该作者

mp2438, i guess that sorta makes sense.

skill, I can't find this in errata. where are you seeing it?

thanks

thommo77

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发表于 2011-7-13 09:00 | 只看该作者

the errata only mentions that the word "availability" should be used, but the explanation is correct.

jmh530

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发表于 2011-7-13 09:22 | 只看该作者

Long story short, Treasuries aren't gonna get you a discount on the rate.

The only collateral that will get you a discount will be "hot" or "special" collateral, which is in short supply and high demand.

canadiananalyst

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发表于 2011-7-13 09:33 | 只看该作者

look at it this way:

new UST gets issued. a dealer ends up short the issue for whatever reason and has to make delivery or he will fail. the UST issue happens to be in short supply since investors want to own the new issue. Since the UST is in short supply and the dealers need to buy the issue or they will fail, the issue is considered on special or hot. You come along and happen to own some. the dealer is willing to give you a repo (lend you money) for a lower rate or even sometimes a close to zero rate in order to get their hands on the collateral you have.

ll11

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发表于 2011-7-13 09:45 | 只看该作者

sct123 Wrote:
-------------------------------------------------------
> look at it this way:
>
> new UST gets issued. a dealer ends up short the
> issue for whatever reason and has to make delivery
> or he will fail. the UST issue happens to be in
> short supply since investors want to own the new
> issue. Since the UST is in short supply and the
> dealers need to buy the issue or they will fail,
> the issue is considered on special or hot. You
> come along and happen to own some. the dealer is
> willing to give you a repo (lend you money) for a
> lower rate or even sometimes a close to zero rate
> in order to get their hands on the collateral you
> have.

That's an interesting way to look at it, but it's simply incorrect.

On the run Treasuries are never "in short supply" - you're trying to justify an incorrect answer and most likely confusing people.