Repurchase agreements, or “repos,” or “RPs,” as they are commonly referred to, are a specific kind of transaction in the complex world of global finance. Not too different from a secured loan, repos are considered one of the lower-risk investment vehicles available.
Here’s how it works. Let’s say you’ve got $10,000 in corporate stocks, or other form of security. You want to make another transaction and you need the cash. So, you secure a loan from a lender by selling and or giving them your stocks or other securities in exchange for cash, and then later you will repurchase them for more. Some securities that people use for repos are Treasury or Government bills and bonds, as well as corporate shares.
As with many other money market vehicles, repos are all assigned a maturity date. The main three types of repos are overnight, term, and open. Overnight is basically just what it sounds like: the repo comes to maturity in 24 hours. A term repo will have a specific date whereupon it comes to maturity. It can be anywhere from two days to two years (but generally not more than the latter). Open repos are open-ended and will come to maturity when the buyer and seller agree to it.
So, if you’re eager to maximize your earnings in the world of money market, you may want to think about investing in repos. After all, you will get collateral in return for your investment and that’s about as low-risk as it gets. Before you make any kind of major financial decision though, be sure to sit down with a qualified expert from the financial services industry and discuss any and all questions you may have about repos, reverse repos, securities lending, tri-party repos, or any other complex financial transactions. After all, you can never be too careful when it comes to investing your hard-earned money – and that’s especially true now that the world financial markets are so uncertain.