Repurchase Agreement Definition Mechanism Money Market Impact

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A Repurchase Agreement, commonly known as a Repo, is a short-term borrowing tool primarily used by financial institutions to manage liquidity. In a repurchase agreement, one party (the seller) sells securities to another party (the buyer) with a promise to repurchase the securities at a predetermined price on a future date. The duration of a repo can range from overnight to several months. For the seller, it functions as a borrowing mechanism, allowing them to obtain funds by selling securities and agreeing to repurchase them later at a higher price, effectively paying interest. For the buyer, it serves as a short-term investment, earning interest income through the purchase of securities. Repos play a crucial role in the money market, providing liquidity and helping to manage short-term interest rates.

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