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Revision as of 12:14, 16 September 2009
In a repurchase agreement, or repo, one party sells assets or securities to another and agrees to repurchase them at a set price on a set date. It is in essence a short term loan using the assets as collateral. Transactions where the securities are sold one day and bought back the next day are known as overnight repos. When they are bought back after a longer period they are known as term repos, sometimes lasting for a month or more. If the agreement is one where securities are bought for resale later it is known as a reverse repo. Many central banks use repos and reverse repos in government debt as part of their open market operations. In a repo the repurchase price is slightly higher than the sale price; this is the interest on the loan. When expressed as an annualised percentage of the sale price it is known as the repo rate. Traders engaging in short selling use reverse repos to acquire the securities they then sell short.