CASE STUDY: ABC BANK plc
We now present a case study of four different repo trades from the point of view of a repo market-making bank, the hypothetical ABC Bank plc. Carry out the calculations to enable you to complete the trade tickets. Answers are given at the end.
1. What sort of yield is this investor receiving compared with Libor?
2. How does the repo rate compare with the return on unsecured paper?
3. Give some reasons why Commercial Bank’s treasurer might make this investment rather than deposit the funds in a bank or purchase a T-bill?
4. What is the running yield on the 5% 2004? If you regard the trade as ABC plc in effect funding its position in this stock, what is the funding gain/ loss during the 1-month period?
1. What is the premium on the equivalent maturity GC rate?
2. By investing the proceeds in CDs, what total profit in basis points will you earn over the 3-month period (on an annualised basis), and what sort of risk are you, the repo dealer, exposing yourself to?
3. How could you have invested the proceeds for a risk-free return?
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