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FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing

A dealer sells USD 50 million of Treasury notes to a money market fund and agrees to buy them back tomorrow at a slightly higher price. From the dealer's perspective, which description of this transaction is correct?

The dealer is doing a repo. It sells securities and agrees to repurchase them at a higher price, which is a secured cash borrowing with the securities as collateral. The money market fund is the party doing the reverse repo and lending cash.

  1. AA repo, in which the dealer is borrowing cash and the securities act as collateralCorrect
  2. BA reverse repo, in which the dealer is lending cash against securities
  3. CAn outright sale of securities with no obligation to repurchase
  4. DAn unsecured loan in which the securities are only a reference asset

Explanation

A party that sells securities with an agreement to repurchase them is doing a repo, which is economically a collateralized cash borrowing. The money market fund is doing the reverse repo. The price difference is the interest on the cash.

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