What is a repurchase agreement (repo) and what is it used for?

• A. A type of derivative swap.
• B. Short-term collateralized borrowing/lending transaction; used for liquidity management and funding.
• C. A regulatory compliance report.
• D. Long-term equity financing instrument.

Answer: (B)

Repurchase agreements, or repos, are short-term collateralized borrowing and lending transactions. In a repo, one party sells securities to another with an agreement to buy them back later at a higher price, so the initial sale acts as a cash loan secured by the securities. The collateral reduces credit risk, and the difference between the sale and repurchase prices reflects interest, known as the repo rate. This structure makes repos a common tool for liquidity management and funding, used by banks, broker-dealers, and even central banks to obtain or deploy cash quickly while keeping risk relatively low. Repos are typically overnight or short‑term, though longer terms exist. They are not derivatives like swaps, not regulatory compliance reports, and not long-term equity financing instruments, which is why the described option best captures their purpose and nature.