When public central banks buy securities from private banks, they do so at a reduced interest rate called the repo rate. Like policy rates, repo rates are set by central banks. The repo interest rate system allows governments to control the money supply within economies by increasing or reducing available resources. A cut in repo rates encourages banks to sell securities for cash to the government. This increases the money supply available to the general economy. Conversely, by raising repo rates, central banks can effectively reduce the money supply by preventing banks from reselling these securities. In the case of borrowing securities, the purpose is to temporarily obtain the security for other purposes, for example. B to hedge short positions or to use them in complex financial structures. Securities are generally lent for a fee and securities lending transactions are subject to other types of legal agreements than rest. A repo is a form of short-term borrowing for government bond traders. In the case of a repo, a trader sells government bonds to investors, usually overnight, and buys them back the next day at a slightly higher price.
This small price difference is the implicit overnight rate. Deposits are usually used to raise short-term capital. They are also a common instrument for central banks` open market operations. Generally speaking, credit risk for real transactions depends on many factors, including the terms of the transaction, the liquidity of the security, the specificities of the counterparties involved and much more. As in many other corners of finance, pensions include terminology that is not common elsewhere. One of the most common terms in the repo area is “leg”. There are different types of legs: for example, the part of the retirement transaction in which the security is originally sold is sometimes referred to as the “starting leg”, while the next redemption is the “narrow part”. These terms are sometimes replaced by “near leg” or “distant leg”. In the period close to a repo operation, the title is sold. In determining the actual cost and benefits of a repo transaction, a buyer or seller interested in participating in the transaction must take into account three different calculations: the same principle applies at rest.
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