What is a Repo

Another word you might come across in connection with the money markets is the term 'repo'.

Now you might think this was something to do with an abbreviation for the word 'repossession' but in fact it has nothing to do with it!

Actually the word repo refers to a type of financial transaction, that is called and 'sale and repurchase agreement', so the repo bit is more to do with repurchase.

In order to understand what it is, if you are familiar with pawnbroking then that will give the essence of what a repo product is and how it works.

Basically, the asset holder gets in touch with someone with lots of money, say a repo house. Then the asset holder sells the asset to the repo house.

In return for the asset, as you would expect, they get given cash. However, it is a CONDITIONAL sale because a repurchase is agreed at point of sale, which is at a later date and at a different price, based on an interest rate added to the borrower.

Now if for some reason the person who sold the asset fails to make good on the repayment then it becomes the full property of the repo house.

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