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Answer: Dollar rolls may involve receiving different securities in the second month, unlike repos where the same securities are repurchased.
**Correct Answer: C** **Explanation:** **Key Differences:** - **Dollar Roll**: In a dollar roll transaction, the securities returned in the second month may be different from those originally sold. This is because dollar rolls are typically used in the mortgage-backed securities market where "substantially similar" securities can be substituted. - **Traditional Repo**: In a traditional repurchase agreement, the exact same securities must be returned. There is no substitution allowed. **Analysis of Other Options:** - **Option A**: While dollar rolls do involve selling and repurchasing securities, this describes the basic structure that both dollar rolls and repos share, not a key difference. - **Option B**: This is incorrect because dollar rolls specifically allow for different securities to be returned, as long as they have substantially similar characteristics. - **Option D**: This is incorrect because both dollar rolls and repos incorporate interest in their pricing through the repurchase price difference.
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What is a key difference between a dollar roll transaction and a traditional repurchase agreement (repo)?
A
In a dollar roll, the initiating party sells securities and agrees to buy them back at a higher price, similar to a repo.
B
Dollar rolls involve the exchange of securities with the same characteristics between parties.
C
Dollar rolls may involve receiving different securities in the second month, unlike repos where the same securities are repurchased.
D
Dollar roll transactions add interest to the repurchase price, unlike repos where interest is not considered.
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