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Reverse Repurchase Agreement Risks

For the party that sells security and agrees to buy it back in the future, it is a repo; for the party at the other end of the transaction, the purchase of the warranty and the consent to sell in the future, it is a reverse buyback contract. A sale/buy-back is the cash sale and pre-line repurchase of a security. These are two separate pure elements of the cash market, one for settlement in advance. The futures price is set against the spot price in order to obtain a market return. The basic motivation of Sell/Buybacks is generally the same as in the case of a conventional repo (i.e. the attempt to take advantage of the lower financing rates generally available for secured loans, unlike unsecured loans). The profitability of the transaction is also similar, with interest on the money borrowed from the sale/purchase being implicitly included in the difference between the sale price and the purchase price. The main difference between a term and an open repo is between the sale and repurchase of the securities. The re-board operations take place in three forms: indicated delivery, tri-party and detention (where the “selling” party maintains the guarantee during the life of the pension). The third form (Hold-in-custody) is quite rare, especially in development-oriented markets, due in part to the risk that the seller may intervene before the transaction is completed and that the buyer will not be able to recover the guarantees issued as collateral for the transaction. The first form – the indicated delivery – requires the delivery of a predetermined loan at the beginning and maturity of the contract.

Tri-Party is essentially a form of trading basket and allows a wider range of instruments in the basket or pool. In the case of a tripartite repurchase transaction, a third-party agent or bank is placed between the “seller” and the buyer. The third party retains control of the securities that are the subject of the agreement and processes payments made by the “seller” to the buyer. The main users of such an agreement are usually monetary authorities, financial institutions, investment fund companies, sovereign wealth funds, commercial banks, pension funds, insurance companies, etc. Reverse rest is mainly used by monetary authorities to obtain money from the banking system and to reduce or prohibit the increase in liquidity in the market in order to control the money supply in the economy. A pension contract (repo) is a short-term sale between financial institutions in exchange for government securities. Both parties agree to cancel the sale in the future for a small fee. Most depots are available overnight, but some can stay open for weeks. They are used by companies to raise funds quickly. They are also used by central banks. If interest rates are positive, the pf redemption price should be higher than the original PN selling price. These short-term loans are made to investors who, while sufficient, are vulnerable to risk.

This can be used to obtain short positions previously hedged by the other party on the market.

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