\n up Firstly, REPOs are rather short-term agreements, normally limited by a year or two. In practice, they are signed for a shorter time. Secondly, if the market situation changes, one of the parties can refuse to follow the agreement.<\/p>\n\n\n\n In other words, the seller can refuse to buy back their securities at the agreed price if the market price has dropped, or the buyer can refuse to give them back if the market price of the asset has grown.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Another risk is the growth of the security price, so that the buyer can refuse to give them back.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n The REPO features such methods of decreasing risks as discount, compensation and margin fees, revaluation, and the opportunity to return a different number of securities.<\/p>\n\n\n\n All income from the securities — dividends<\/a>, 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.<\/p>\n\n\n\n Also, the agreement can have other conditions, such as the buyer can receive dividends<\/a> instead of the seller but the security price will fall accordingly.<\/p>\n\n\n\n A market player has 100 shares<\/a> 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n REPOs can seriously facilitate the development of a company or private investor. However, risks of such contracts must not be neglected. For example, one of the parties can fail to follow the agreement.<\/p>\n\n\n\n On the other hand, both parties of a REPO are in more or less mutually profitable conditions. Signing such a contract, it is absolutely necessary to weight up all drawbacks and pluses in advance and study the market situation of the asset in question.<\/p>\n\n\n\n
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\n <\/div>\n<\/div>\n\n\n\n<\/span><\/a>Advantages of REPOs<\/span><\/h2>\n\n\n\n
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<\/span><\/a>Drawbacks of REPOs<\/span><\/h2>\n\n\n\n
<\/span><\/a>Are there risks in REPOs<\/span><\/h2>\n\n\n\n
<\/span><\/a>How to decrease REPO risks<\/span><\/h2>\n\n\n\n
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<\/span><\/a>Who gets dividends from shares in REPOs<\/span><\/h2>\n\n\n\n
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\n <\/div>\n <\/div>\n\n\n\n<\/span><\/a>Example of REPO<\/span><\/h2>\n\n\n\n
<\/span><\/a>Closing thoughts<\/span><\/h2>\n\n\n\n
REPO, aka Repurchase Agreement, is an agreement on selling securities that presumes their obligatory buyback<\/a> at a certain price after certain time. Such agreements let the seller loan money quite fast.<\/p>\n\n\n\n A REPO consists of two part:<\/p>\n\n\n\n As a result, a REPO has two agreements inside: an operation with securities and a forward contract.<\/p>\n\n\n\n\n
<\/span><\/a>Conditions of REPOs<\/span><\/h2>\n\n\n\n
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