The Classic Repo
The term repo is an abbreviation for 'Sale and Repurchase Agreement'. A repo is a sale of assets and a simultaneous agreement to repurchase equivalent assets at a future date for the original value plus a return on the use of the cash.
The transaction, in effect, allows the dealer to borrow cash to pay for a security it has purchased using the security itself as a collateral. The entity borrowing cash and pledging securities in exchange is transacting a repo; the entity taking in securities in exchange for lending (investing) cash is executing a reverse repo.
By the term 'equivalent assets' or securities we mean the same issuer forming part of the issue, the same nominal amount, the same currency, the same description, the same value unless agreed otherwise and equivalent property after a corporate event.
