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Repurchase Agreement Hedging

Dic 16, 2020 by     No Comments    Posted under: Sin categoría

Under a pension contract, the Federal Reserve (Fed) buys U.S. Treasury bonds, U.S. agency securities or mortgage-backed securities from a primary trader who agrees to buy them back within one to seven days; an inverted deposit is the opposite. This is how the Fed describes these transactions from the perspective of the counterparty and not from its own point of view. A decisive calculation in each repurchase agreement is the implied interest rate. If the interest rate is not favourable, a reannument agreement may not be the most effective way to access cash in the short term. A formula that can be used to calculate the real interest rate is below: from the end of 2008, the Fed and other regulators have established new rules to dispel these and other concerns. One consequence of these rules was to increase pressure on banks to maintain their safest assets, such as Treasuries. They are encouraged not to borrow them through boarding agreements. According to Bloomberg, the impact of the regulation was significant: at the end of 2008, the estimated value of the world securities borrowed was nearly $4 trillion. But since then, that number has been close to $2 trillion. In addition, the Fed has increasingly entered into repurchase (or self-reversion) agreements to compensate for temporary fluctuations in bank reserves.

In the United States, the most common type of repo is the tripartite agreement. A large investment bank acts as an intermediary. It mediates an agreement between a financial institution that needs liquidity, usually a stockbroker or hedge fund, and another with a surplus to lend, such as a money fund.B. When state-owned central banks buy back securities from private banks, they do so at an updated interest rate, called a pension rate. Like policy rates, pension rates are set by central banks. The repo-rate system allows governments to control the money supply within economies by increasing or decreasing available resources. A reduction in pension rates encourages banks to resell securities for cash to the state. This increases the money supply available to the general economy.

Conversely, by raising pension rates, central banks can effectively reduce the money supply by preventing banks from reselling these securities. Cash paid on the initial sale of securities and the money paid at the time of redemption depend on the value and type of guarantee associated with the pension. In the case of a loan. B, both values must take into account the own price and the value of the interest accrued on the loan. Although the transaction is similar to a loan and its economic effect is similar to a loan, the terminology is different from that of the loans: the seller legally buys the securities from the buyer at the end of the loan period. However, an essential aspect of rest is that they are legally recognized as a single transaction (important in the event of a counterparty`s insolvency) and not as a transfer and redemption for tax purposes. By structuring the transaction as a sale, a repot provides lenders with significant protection against the normal functioning of U.S. bankruptcy laws, such as. B automatic suspension and prevention of provisions.

Earnings/net loss of covered items were low relative to financing costs, with pension rates relatively stable. Nevertheless, Treasury repo interest rates may change unexpectedly due to changes in the factors that influence them, such as monetary policy and the issuance of accounts.

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