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RoboForex - www.roboforex.com
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[QUOTE="Vlad RF, post: 209815, member: 61796"] [B][SIZE=5]What One Needs to Know about REPO[/SIZE][/B] [I]Author: Maks Artemov[/I] [CENTER][IMG]https://blog.roboforex.com/wp-content/uploads/2022/06/8-1536x662.jpg[/IMG] [B]Dear Clients and Partners,[/B][/CENTER] This article is devoted to REPO — Repurchase Agreements — and everything about them: their peculiarities, advantages and drawbacks, risks and how to avoid them. [SIZE=5]What are REPOs[/SIZE] REPO, aka Repurchase Agreement, is an agreement on selling securities that presumes their obligatory buyback at a certain price after certain time. Such agreements let the seller loan money quite fast. A REPO consists of two part: [LIST] [*]The owner of securities sells them to the buyer for a certain term and takes on the responsibility to buy them back as soon as the term ends. The term and the sum of the buyback are agreed upon by the parties beforehand. [*]When the term ends, the buyer is to give the securities back to the seller, receiving their money plus commission fee is exchange. [/LIST] As a result, a REPO has two agreements inside: an operation with securities and a forward contract. [SIZE=5]Advantages of REPOs[/SIZE] [LIST] [*]The seller can loan money quickly on market conditions without addressing a bank. Moreover, the operation itself does not take long. [*]The buyer can make a profit on short-term placement of free cash without the risk of losing it because they get securities in exchange. If the seller refuses to buy back their assets, the buyer can sell them freely in the stock market and get back their money. [/LIST] [SIZE=5]Are there risks in REPOs[/SIZE] One of the risks is falling of the market price of the securities that the buyer has bought. In such a case, the seller can refuse to complete the second part of the agreement and never buy back the asset. The seller will have to get rid of the securities at a lower price and suffer losses, or leave it in the portfolio and wait for the price to grow. Another risk is the growth of the security price, so that the buyer can refuse to give them back. Moreover, it might so happen that at the REPO expiry the buyer will have no necessary securities available. For example, they might have sold them at a better price. The buyer may always refuse to give the asset back to the seller for various reasons including bankruptcy. [SIZE=5]Who gets dividends from shares in REPOs[/SIZE] All income from the securities — dividends, coupons, etc. — belongs to the seller because they own the shares. The buyer receives the securities as a temporary guarantee. That is why the buyer must pass all the income from the securities to the seller. Also, the agreement can have other conditions, such as the buyer can receive dividends instead of the seller but the security price will fall accordingly. [SIZE=5]Example of REPO[/SIZE] A market player has 100 shares of a company, 10 USD each. At a certain point, they need money, and they find a buyer ready to buy 100 shares right now but for 8 USD each. Signing a REPO, the buyer agrees on selling (or returning) 100 shares for 8 USD each plus 10%. When the contract expires, the seller buys their shares back at the said price. As a result they got a loan for 10% a year, and the buyer got their money back and earned 10% of the whole sum. [URL=https://blog.roboforex.com/blog/2022/06/10/what-one-needs-to-know-about-repo/?utm_source=earnforex.com&utm_medium=cpc&utm_campaign=rf_en_external_forums_blog&utm_content=text]Read more at R Blog - RoboForex[/URL] [B]Sincerely, RoboForex team[/B] [/QUOTE]
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