Understanding Repo Markets
[Pages:132]Understanding Repo Markets
Moorad Choudhry
Objectives of the Course
g Defining and describing the mechanics of Repo
g Understanding market fundamentals and applying knowledge gained to daily work in the repo markets
g Introducing trading theory and strategy
(c) 2000 The Securities Institute (Services) Ltd
2
Agenda
g Introduction and Market Background g Financial Arithmetic g Uses and Economic Functions g Mechanics of Repo g Risks in trading Repo g Legal, Accounting, Tax and Capital g Repo netting g Overseas and Central Bank Repo g Case study - repo trades
(c) 2000 The Securities Institute (Services) Ltd
3
Agenda (cont.)
g The UK Gilt Repo Market g Trading and Hedging Strategy g Electronic Repo Trading g The Implied Repo Rate and Basis
Trading g The Yield Curve g Using BloombergTM Screens g Introduction to Equity repo
(c) 2000 The Securities Institute (Services) Ltd
4
Introduction
(c) 2000 The Securities Institute (Services) Ltd
5
Definition of a Repo
g The term "Repo" is from "Sale and Repurchase Agreement"
Repo is a money market instrument. There are two usually two parties to a repo transaction.
g One party "sells" bonds to the other while simultaneously agreeing to repurchase them or receive them back at a specified future date
g One party requires either the cash or the bonds and provides collateral to the other as well as compensation for the temporary use of the desired asset
g Although legal title to the collateral is transferred, the seller/lender retains both the economic benefits and the market risk of owning them
g If cash is involved the party receiving the cash will pay interest on this cash at the agreed repo rate
(c) 2000 The Securities Institute (Services) Ltd
6
Repo Definition (cont.)
g Repo is therefore a secured loan g Legally : a sale and repurchase of bonds g Economically : a secured loan of cash g The cash investor receives the repo rate g Advantages for the cash investor :
-- secured investment -- repo rate competitive with bank deposits -- diversification away from bank risk
(c) 2000 The Securities Institute (Services) Ltd
7
Market Background
(c) 2000 The Securities Institute (Services) Ltd
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