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 higher price on a later date is most likely described as:
The party that sells the security and agrees to repurchase it later at a higher price is the repo seller, who is effectively borrowing cash against collateral. The counterparty lending the cash is on the reverse repo side and earns the repo rate.
- Athe reverse repo party.
- Bthe repo seller, who is borrowing cash.Correct
- Cthe lender of cash, who earns the repo rate.
Explanation
In a repo, the seller of the security receives cash now and repurchases the security later at a higher price, so it is economically a collateralized borrower. The counterparty buying the security and lending cash is on the reverse repo side and earns the repo rate.
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