Repos: Facilitating a dealer’s hunt for cash & securities

Nov 30 2012, 10:45 IST
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SummaryThe term repo stands for ‘repurchase agreement’. Securities dealers carry large inventories of bonds for they need to stand ready to sell whenever an investor seeks to buy.

can be invested.

A repurchase agreement is subject to standard industry documentation and both legs of the transaction together constitute a single contract. In India, such transactions are known as ‘Ready-Forward’ or RF contracts, since the first leg, whereby the borrower pledges and gets the cash, is a spot transaction, while the second leg, whereby he commits to return the cash in return for the securities, is essentially a forward contract.

The collateral for such transactions is typically a government security. However, in the US, other debt securities, such as commercial paper may be offered as collateral.

The writer is the author of ‘Fundamentals of Financial Instruments’, published by Wiley, India

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