Hello, having trouble understanding repos. Can someone provide a real world example of who the typical borrower and lender is between a bank and a hedge fund?
Repos can be done by any party, it is a binding contract, although credit party and counterparty risks exist.
It is typically done between banks, including the central bank, to free up short term liquidity at a small price.
For example, a bank needs to meet its reserve requirements for the month tomorrow, and it is short on reserve deposits, so it sells some of the government securities it has, to another bank, investor, or the central bank itself, with a binding agreement to repurchase it back at a slighly higher price, usually overnight, and not more than a week.
Repos are primarily a secured form of borrowing,
Hedge fund holds government securities and wants financing for them. Hedge fund lends securities to a bank or broker dealer using a 3 month Repo at 50 bps. They send securities to bank and the bank sends them cash. They use cash for whatever it is they want to do, often they can earn a positive carry on the securities, for example buy a 3% yielding security and finance it for 50 bps. At the end of the term the bank or broker dealer returns the securities and the hedge fund pays back the cash + 50bps.
@Mmarin, so in your example, is the “lender” the hedge fund and the “borrower” the bank that sends them cash?
The hedge fund is the borrower of the cash and the lender of the securities. The bank is the lender of cash and borrower of securities. Generally banks are lenders of funds and hedge funds are borrowers of funds.