Treasuries Agencies Mortgagebacked securities If the duration of the loan is one day the agreement is called an overnight repo Approximately 50 of the market Otherwise the agreement i ID: 822506
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municipality for 51 days. ¥!The market v
municipality for 51 days. ¥!The market value of the collateral is $31,228,715. ¥!The municipality takes a
2% haircut, lending 98% of the market v
2% haircut, lending 98% of the market value, or $30,604,140.70 at a repo rate of 5.25%. ¥!After 51 days,
the municipality returns the $30 millio
the municipality returns the $30 million bonds, and the dealer repays ¥!$30,604,140.70 (1+0.0525 x 51/3
60) = $30,831,759. ¥!Note that repo rate
60) = $30,831,759. ¥!Note that repo rates are !Treasuries !!Agencies !!Mortgage-backed securities If th
e duration of the loan is one day, the a
e duration of the loan is one day, the agreement is called an overnight repo. * Approximately 50% of the
market. !!Otherwise the agreement is a
market. !!Otherwise the agreement is a term repo * The term can be as long as one year. of three month
s or less. !!Open repo is an overnight r
s or less. !!Open repo is an overnight repo whose - (P0 x (1 - hc) + repo interest) Time 0 cash flow +
Time T cash flow = PT - P0 - repo inter
Time T cash flow = PT - P0 - repo interest Uses of Repos in Practice: Short positions ¥!Suppose a deale
r wants a position that will profit if b
r wants a position that will profit if bond prices decline. ¥!He can simultaneously enter into a reverse
repo and sell the collateral. !the qu
repo and sell the collateral. !the quality of the collateral (agencies and mortgages may also serve as
collateral in addition to Treasuries),
collateral in addition to Treasuries), ¥!the term of the loan, and !Demand !!Overall Size of Short Base