Repo’s : The term “repo” is used as an abbreviation for Repurchase Agreement or Ready Forward. A “repo” involves a simultaneous “sale and repurchase” agreement.
A “repo” works as follows. Party a needs short-term funds and Party B wants to make a short-term investment. Party A sells securities to Party B at a certain price and simultaneously agrees to repurchase the same after a specified time at slightly higher price. The difference between the sale price and the repurchase price represents the interest cost of Party.
A “reserve repo” is the opposite of “repo” – it involves an initial purchase of an asset followed by a subsequent sale. It is a safe and convenient form of short-term investment.
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