A repurchase agreement, commonly known as a „repo“ in the finance industry, is a form of short-term borrowing. It involves the sale of securities (typically government bonds or other highly-rated assets) with the agreement that the seller will repurchase the same securities at a higher price on a specified date.

The buyer in a repo transaction essentially lends money to the seller, and the securities act as collateral for the loan. The interest rate on the loan is determined by the difference between the sales price and repurchase price of the securities.

The repurchase agreement allows both parties to benefit from the transaction. The buyer earns interest on the loan and receives collateral that can be sold if the borrower fails to repurchase the securities. The seller gains immediate access to cash and can repurchase the securities at a lower price, effectively acting as a form of financing.

Repurchase agreements are commonly used by financial institutions to manage short-term liquidity needs. They are also used by the Federal Reserve in their open market operations to control the money supply and interest rates.

It is important to note that repos are not without risk. If the seller defaults on the repurchase agreement, the buyer may be left with securities that have decreased in value and may not be able to recover the full value of the loan. Therefore, it is important for buyers to conduct due diligence and only enter into repurchase agreements with reputable counterparties.

In summary, a repurchase agreement is a form of short-term borrowing that involves the sale of securities with the agreement to repurchase them at a higher price on a specified date. They are commonly used by financial institutions to manage short-term liquidity needs and by the Federal Reserve in their open market operations. However, they do come with risks and should be entered into with caution.