Can someone explain with an example? Think we should focus on this?
say you want to borrow 10 grand from me for a week. I don’t want to just lend you the money because I don’t trust that you’ll pay me back so why don’t I buy your car (I’ll hold on to the pink slip) for 10 grand and you’ll agree to buy (repurchase i.e. repo) the car back from me in a week for 11 grand.
What’s happened here is that I’ve just loaned you some money, but we’ve done this by buying and then reselling an asset. The implied repo rate is just the loan rate implied in the cash flows (i.e. if you borrowed 10k from you bank and had to pay 11 grand back in a week, what would the implied interest rate be?)
This is in the optional section. why are you guys reading it?
good call. I got confused with the errata.