By Moorad Choudhry
The Repo markets have grown dramatically long ago few years as a result of have to hedge brief positions within the capital and derivatives markets. almost all significant foreign money markets on the planet now have a longtime repo marketplace, the ability is usually more and more getting used in constructing foreign money markets to boot.
This e-book is a realistic advent that makes a speciality of the tools, purposes and chance administration ideas crucial for this swiftly evolving industry. totally up-to-date to mirror the alterations in those markets, the ebook additionally comprises labored examples and case experiences, and new sections on basket and dependent finance repo.
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Extra info for An Introduction to Repo Markets
As the notes are not backed by any collateral they rely on the credit rating of the issuing corporation. Therefore, only sufficiently large and creditworthy corporates can access this market. All these securities are sold at a discount-to-par value. On maturity the investor receives the par value. Explicit interest is not paid on MARKET BACKGROUND 27 discount instruments, rather interest is reflected implicitly in the difference between the discounted issue price and the par value received at maturity.
Repo as a financing transaction Cash-rich money market investors finance bond traders by lending out cash in a repo. They receive general collateral (GC) in return for their cash, which is any bond of the required credit quality. Legally, this is a sale and repurchase of bonds; economically, it is a secured loan of cash. The cash investor receives the repo rate of interest for making the loan. The advantages of a repo transaction for the cash investor are: . . it is a secured investment; the returns are competitive with bank deposits and occasionally higher; this is a diversification from bank risk.
Hence, we have a spot sale and forward repurchase of bonds transacted simultaneously. The repo rate is not explicit, but is implied in the forward price. If initial margin is required it is given to the provider of cash (the buyer). Any coupon payments during the term are paid to the seller; however, this is done through incorporation into the forward price, so the seller will not receive it immediately. 2 This is also known as a ‘buy/sell-back’. Not surprisingly, they mean the same thing! 12 AN INTRODUCTION TO REPO MARKETS Until an annex was incorporated into the standard GMRA, generally sell/buy-backs were not subject to a legal agreement; so, in effect the seller had no legal right to any coupon, and there was no provision for margin calls during the term of the trade (known as ‘variation margining’).
An Introduction to Repo Markets by Moorad Choudhry