CFA Level I · CFA Level I Exam · Fixed-Income Issuance and Trading
In a repurchase agreement, the party that sells the security and agrees to buy it back at a later date at a higher price is most likely acting as the:
The party selling the security and agreeing to repurchase it at a higher price is the repo seller. It is borrowing cash and pledging the security as collateral, while the buyer lends cash and earns the repo interest as the price difference.
- Arepo buyer, lending cash against collateral
- Brepo seller, borrowing cash against collateralCorrect
- Crepo dealer, taking on the credit risk of the collateral
Explanation
The seller of the security receives cash now and repurchases the security later at a higher price. Economically this is a collateralized loan, with the repurchase price exceeding the sale price by the interest. The buyer is the lender of cash, so option A describes the wrong party.
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