How does maturity of collateral affect REPO rate? How is maturity of collateral linked with quality of collateral?
Repo rate is not affected by maturity of collateral. Repo rate is a function of repo term, not collateral maturity. Longer the terms, higher the rate. Repo rate is affected by quality of collateral. higher the quality, lower the rate.
Note sure if I have read this before but IMO maturity of collateral will affect collateral rate. For eg. longer duration security will be considered risky than shorter duration (more price fluctuations) and may entail higher repo rate. Quality may not be linked though with the maturity… Any other thoughts?
Repo rate is affected by availability (ie. demand and supply). If supply for higher DUR collateral decrease, repo rate will increase. On the other hand, If supply for higher DUR collateral increase, repo rate on high DUR collateral will fall. I guess it is the demand/ supply affected the repo rate, not maturity of collateral. Schewser Book 3. 75 say Repo rate is a function of repo term, not collateral maturity.
sorry, typo If supply for higher DUR collateral decrease, repo rate will decrease. On the other hand, If supply for higher DUR collateral increase, repo rate on high DUR collateral will rise.
Factors which affect the repo rate are: - quality of the collateral - term of the repo (not the collateral, just the repo itself) - delivery requirement - availability of the collateral - prevailing interest rates - seasonal factors
Counterparty risk figures into this as well, no? Some repo trades are tri-party, but not all if I’m not mistaken…
I couldn’t see anything in the textbook about counterparty risk - the only thing was that if the repo did not require delivery of the security then there was an element of counterparty risk Nothing about tri-party that I could see