An Introduction to Repo Markets, Third Edition

REPO CASE STUDY ANSWERS

Trade 1

ABC Bank plc

 

ABC repo trading ticket

Counterparty Commercial Bank plc

Trade date 4 January 2000 Settlement date 5 January 2000

Collateral UKT 5% 2004 Nominal amount £50,000,000

Repo rate

Term 33 days (From 5/1/00 To 7/2/00)

Clean price 95.25

Accrued 0.3961749 (5.00/2 × 29/183) or (5.00 × 29/366)

Dirty price 95.6461749

Settlement amount (wired amount) £47,823,087

Repo interest £237,805.21 (£47,823,087 × × 33/365)

Termination money £48,060,892.21

1. Commercial Bank plc is earning Libor — 15 bps, but with AAA security against its investment.

2. It is 10 bps lower (the CD is at 5.60%). Repo investments usually yield about the same or less than investment grade unsecured paper, government bond repo always less due to the quality of security.

3. Investors often have a limited amount of credit lines for unsecured investment counterparties. In addition, the repo offers 30-bps higher return than the T-Bill for what is still essentially government risk. Finally, buying paper can have mark-to-market implications and associated interest-rate risk, which Commercial Bank plc may not desire, and which requires different monitoring and settlement systems.

4. The running yield is 5.227% (this is an approximation and uses the dirty price). In effect, the net funding ...