Why the answer to this cannot be C? I thought delivery requirement would be a big factor here?
Physical delivery decreases the repo rate.
Physical Delivery gets you best repo
So, if you remove “physical delivery”, it will increase repo - right? Hence delivery requirement is a big factor - that is what I thought.
Any thoughts - is “delivery requirement” not a big factor to consider here?
They are asking what is most likely to increase the rate. The collateral is delivered so that wouldnt increse the rate. The term of the repo is two months which is much longer than a normal contract (usually overnight)…hence requires a higher rate.
But you could undo the “collateral delivery” requirement and increase the rate. If it is not to be considered as a potential factor, I feel they should not even give it as a choice.
All three items are factor into the repo rate in this question: quality of collateral-AAA sovereign = lower rate deliver of collateral = lower rate Term - longer than typical contract = higher rate
The key is the 2 months part…repos are typically overnight and rolled; two months is quite extensive for a repo, thus the increased rate
Unfortunately, I thought of the question as “what can increase the repo rate” So I thought of “collateral delivery” being un-done. But if they ask why is the rate already high, then “increased term” is the answer.