This chapter defines repo and reverse repo agreements. Through worked-out examples, the chapter illustrates how to finance long positions and establish short positions in repo markets. Real-life features such as haircuts (margins) are treated. The differences between general collateral (GC) repo rates and special repo rates are explained. The relationship between GC repo rates and other short-term interest rates such as the effective Fed funds rate and one-month LIBOR are analyzed. The possibility of fails in repo markets and recent innovations in the repo markets are described.
Repurchase agreements, often simply referred to as