Explanation:
Repos are typically used by financial institutions to raise cash. In a repo transaction, the seller of securities agrees to sell them to the buyer at a specified price and then repurchase them at a later date at a slightly higher price. The securities serve as collateral for the loan. On the other hand, reverse repos are typically used by financial institutions to invest cash.
A is incorrect. In a repo, the seller of securities agrees to repurchase them at a later date at a slightly higher price.
B is incorrect. In a reverse repo, the buyer of securities agrees to sell them back at a later date, but not at a slightly lower price. Instead, the buyer (who is effectively lending money) agrees to sell them back at a slightly higher price. This mirrors a repo but from the perspective of the counterparty.
D is incorrect. This is not always true. While it's true that the buyer usually initiates the transaction by making an offer, both repos and reverse repos can be initiated by either party depending on the market conditions and their individual needs.
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Q.5378 During a presentation on the quarterly performance of his bank, a risk manager highlights the differences between repurchase agreements (repos) and reverse repurchase agreements (reverse repos). Which of the following statements made by the manager is correct?
A
In a repo, the seller of securities agrees to buy them back at a later date at a slightly lower price.
B
In a reverse repo, the buyer of securities agrees to sell them back at a later date at a slightly lower price.
C
Repos are typically used to raise cash, while reverse repos are typically used to invest cash.
D
Repos are initiated by the buyer of securities, while reverse repos are initiated by the seller of securities.
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