Friday, July 29, 2005

REPO trade




An apt example for the REPO trade is found from the EUREX website.

Example

Phase 1

A bond trader (the seller) wishes to borrow € 25 million to satisfy his short term requirement for one week. He contacts a REPO dealer (the purchaser) & who offers the bond trader a REPO rate of 5.25%

Phase 2

The bond trader accepts the offer. On the value date, he delivers the “€ 24 million principal amount of 6.5% Bonds of 2003� against € 25 million in cash. the REPO dealer pays € 25 million in return for the “€ 24 million nominal amount of 6.5% Bonds of 2003�.

Phase 3

At the end of the one-week term of the contract, the purchaser returns the € 24 million of Bonds to the seller. The latter repays the loan of € 25 million, plus interest of:

25,000,000 * 5.25 * 7 / (100 * 360) = € 25,520.83

Advantages of REPO Transaction

1. Repos are safer as the lender holds government securities (or other special bonds ) in its own name. Thus REPO is a zero rick transaction.

2. A REPO helps banks to meet their mandatory requirements for investing in government securities. Under the law, banks are required to invest a certain portion of their deposits in government securities. If their holdings are not up to the prescribed level, they face punitive action. So, if a bank needs securities for a short period, REPO provides the opportunity

Source

http://www.eurexrepo.com/index2.html?5&1&swx/overview_repos_en.html

http://economictimes.indiatimes.com/articleshow/1102808.cms

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