How To Price Repurchase Agreements

The cash paid on the initial sale of securities and the money paid at the time of the repurchase depend on the value and type of security associated with the pension. In the case of a loan. B, both values must take into account the own price and the value of the interest accrued on the loan. However, the initial cash would be based on the market value of the guarantees and, as a rule, the lender would apply a haircut, say 2%, so that you will receive cash of 98% of the market value of the guarantees. The redemption price is calculated on the basis of this initial cash, so you pay interest on what you borrowed. The haircut is intended to protect the lender in the event of a decrease in the value of collateral or to reflect other security-related risks such as illiquidity, incorrect risk, etc. The intial margin plays a similar role in the Exchange Cleared transaction. While conventional deposits are generally instruments that are sifted against credit risk, there are residual credit risks. Although this is essentially a guaranteed transaction, the seller may not buy back the securities sold on the due date. In other words, the pension seller does not fulfill his obligation. Therefore, the buyer can keep the warranty and liquidate the guarantee to recover the borrowed money. However, security may have lost value since the beginning of the operation, as security is subject to market movements. To reduce this risk, deposits are often over-insured and subject to a daily market margin (i.e., if the guarantee ends in value, a margin call may be triggered to ask the borrower to reserve additional securities).

Conversely, if the value of the guarantee increases, there is a credit risk to the borrower, since the lender is not allowed to resell it. If this is considered a risk, the borrower can negotiate a subsecured repot. [6] In 2008, attention was drawn to a form known as Repo 105 after the Collapse of Lehman, since repo 105s would have been used as an accounting device to mask the deterioration of Lehman`s financial health. Another controversial form of buyback order is the “internal repo,” which was first highlighted in 2005. In 2011, it was proposed that, in order to finance risky transactions on European government bonds, Rest could have been the mechanism by which MF Global endangered several hundred million dollars of client funds before its bankruptcy in October 2011. Much of the deposit guarantee is obtained through the re-library of other customer security. [22] [23] 2) Cash payable on the redemption of the guarantee For the party that sells the guarantee and agrees to buy it back in the future, it is a repo; for the party at the other end of the transaction, the purchase of the warranty and the consent to sell in the future, it is a reverse buyback contract.

Author: Franck Pertegas

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