Repo agreement around, please, someone, agreement

whew1110

can someone please explain to me what a repo agreement is? i cant seem to wrap my head around this

eagles_dare13

Repo is a type of collateralized financing arrangement for bond purchases.

In simple terms, the lender effectively buys the asset on behalf of the investor based on a repurchase assurance from the investor.

From the lenders perspective both buying and selling prices are locked in per the repo agreement, which eliminates the price risk (subject to investor not defaulting). The difference represents interest on the lending.

The investor's purchase price is fixed (the repo price that they would pay to buy from the lender). The investor is thus hoping for leveraged profit from future upside.

It might also be helpful to consider the following steps for a simplified example

1. Investor buys asset for $100, sells asset to lender for $100, investor net cash flow = 0, lender net cash outflow $100
2. At some point in future investor repurchases asset from lender for $110 (repo price), investor net cash outflow $110; lender has earned 10% return
3. Investor immediately sells asset for $115; investor has earned $5 without any cash payment upfront to purchase asset in step 1