Classic repo illustration

Repo is essentially a secured loan. The term comes from sale and repurchase agreement however, this is not necessarily the best way to look at it. Although in a classic repo transaction legal title of an asset is transferred from the seller to the buyer during the term of the repo, in the author s opinion this detracts from the essence of the instrument a secured loan of cash. It is therefore a money market instrument. Later we formally define repo and illustrate its use for the moment we need only to think of it as a secured loan. The interest on this loan is the payment made in the repo. 

We consider first a classic repo in the United Kingdom gilt market between two market counterparties, in the 5.75% Treasury 2009 gilt stock. The terms of the trade are given in Exhibit 10.3 and illustrated in Exhibit 10.4. Note that the terms of a classic repo trade are identical, irrespective of which market the deal is taking place in. So the basic trade, illustrated in Exhibit 10.3, would be recognisable for bond repo in European and Asian markets. 

EXHimr 10.6 Bloomberg Screen for the Classic Repo Trade Illustrated in Exhibit 10.7... 

We illustrate a stock loan where the transaction is stock-driven. Let us assume that a securities house has a requirement to borrow a UK gilt, the 5.75% 2009, for a one-week period. This is the stock from our earlier classic repo and sell/buyback examples. We presume the requirement is to cover a short position in the stock, although there are other reasons why the securities house may wish to borrow the stock. The bond that it is offering as collateral is another gilt, the 6.50% Treasury 2003. The stock lender, who we may assume is an institutional investor such as a pension fund, but may as likely be another securities house or a bank, requires a margin of 5% as well as a fee of 20 basis points. The transaction is summarised in Exhibit 10.12. 

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