In around two minutes you will know what is a Reverse Repurchase Agreement. You will get both professional definition and easy explanation. No intro, no outro, straight to the point.
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Reverse Repurchase Agreement or “reverse repo” is the agreement to purchase securities now in order to sell them back in the future.
Reverse Repurchase Agreement is the opposite to Repurchase Agreement. And if you are not sure what it means, feel free to watch my previous video where I talk about it.
Imagine you are an investor with substantial cash reserves who is looking to make some extra cash quickly with almost no risks to it.
In this case you might be interested in reverse repurchase agreement.
All you need to do is to find the owner of substantial amount of government securities who is looking to raise some short-term capital.
If you both meet each other, the owner sells you government securities and agrees to buy them back in the nearest future, usually the next day or in 24, or in 48 hours. And the amount of money that you are about to receive back is a little bit higher than you have initially spent.
This difference between what you paid and what you got back is your reward.
For you as an investor, this whole transaction was done under reverse repurchase agreement. But for the owner of the securities, it was just a repurchase agreement.
In case the owner is not able to purchase back the securities, you have the right to sell them on the open market to mitigate the risks of losses.
As a result of reverse repurchase agreement, you get some extra cash for lending your money, and the owner of the securities is able to raise short term capital.
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WHAT IS A REVERSE REPO? Straight to the Point #STTP #73
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