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Principles of Financial Engineering, 2nd Edition by Salih N. Neftci

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CHAPTER 6

Repo Market Strategies in Financial Engineering

1. Introduction

This is a nontechnical chapter which deals with a potentially confusing operation. The chapter briefly reviews repo markets and some uses of repo. This is essential for understanding many standard operations in financial markets.

Many financial engineering strategies require the use of the repo market. The repo market is both a complement and an alternative to swap markets. During a swap transaction, the market practitioner conducts a simultaneous “sale” and “purchase” of two sequences of cash flows generated by two different securities. For example, returns of an equity instrument are swapped for a floating rate Libor. This is equivalent to selling the equity, receiving ...

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