Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Professor Carpenter
Suggested reading Veronesi, Chapter 1 Tuckman, Chapter 15 Pozsar, et al., Shadow Banking
Professor Carpenter
Repos
We often talk about buying and shorting securities. In the fixed income market, these transactions are accomplished with the use of the repo market. A repurchase agreement, or repo, is a sale of securities for cash with a commitment to repurchase them at a specified price at a future date. Practically, the repurchase agreement by itself is simply a collateralized loan.
Repo Diagram
Dealer
Borrow money
Settlement date
Counterparty
Lend securities (collateral)
End of term
Professor Carpenter
Example
Dealer repos $30 million par of a Treasury bond to a municipality for 51 days. The market value of the collateral is $31,228,715. The municipality takes a 2% haircut, lending 98% of the market value, or $30,604,140.70 at a repo rate of 5.25%. After 51 days, the municipality returns the $30 million bonds, and the dealer repays $30,604,140.70 (1+0.0525 x 51/360) = $30,831,759. Note that repo rates are simple interest rates that use an actual/360 calendar (in the U.S.--some other countries use actual/365).
Reverse Repo
A reverse repo transaction is essentially just the other side of a repo transaction. However, the labels are determined from the dealer's viewpoint, so if the dealer borrows money, it's a repo if the dealer lends money, it's a reverse repo.
Professor Carpenter
Types of Collateral
Treasuries Agencies Mortgage-backed securities Even corporate bonds, equity, or custom collateral
Financing by U.S. government primary dealers involving U.S. government, federal agency, corporate and federal agency MBS securities. Source: SIFMA.
Professor Carpenter
Professor Carpenter
Professor Carpenter
Professor Carpenter
REPO Customer
Receive collateral of securities worth P0
Time 0
pay P0
lend P0 x (1 - hc)
Time T
receive PT
Time T cash flow to dealer = PT - (P0 x (1 - hc) + repo interest) Time 0 cash flow + Time T cash flow = PT - P0 - repo interest
Professor Carpenter
Professor Carpenter
10
Professor Carpenter
11