SS10: R25, P159: Q16: cost of carry

CFA Level III
#1

SS10: R25, P159: Q16: cost of carry

the cost of carry here refer to repo rate? Thanks.

#2

Short term (overnight ) rates which are the closest to risk free are called repo in Europe and some Asian countries . In the us they are called the discount rate . They are a rate that banks lend to each other overnight . Because they’re AAA rated , it is called risk free

#3

like you said hw, as to why they called it cost of carry, trying to be fancy…

janakisri, are you sure about what you said, repo rates are different from discount rates, is not discount rare the US equivilant of libor which is not secure and it is interbank rate, while repo anyone with collateral can do it, and it varies bases on what the collateral is among other things

#4

repo is usually set by a Central bank . The bank lends and borrows at this rate from another bank overnight . Of course to you or another borrower the rate could be different ( because of credit rating ) . repo is mentioned as a risky overnight rate too in the cfa text , but the basis behind that is the repo rate for AAA banks , to which a spread is added.

#5

^, i suspect you might be wrrong

first repo and interbank rates are different

second the central bank does not set the rates bank lend to each other, they are free to lend at whatever they want i belive, the central bank however can inffluence that rate by doing things like reserve requirements

#6

interbank rates are not secured by collateral, while repo is, i think you got the 2 mixed up cause they talked about how the collateral can be transfered in the accounts with the central bank…

or maybe i am wrrong and you are right, a third opinion guys ?

#7

You are right that the rate is not imposed by Central banks . But they’re very big players in the overnight market by doing what they call open market operations , by which they manage to control the repo to what they set as the fed funds rate . Because they are huge players , effectively they are able to control the repo rate anyway by withdrawing or providing liquidity

This is the same thing the RBI does in India does too to control the repo. Recently they announced a reduction of 50 bps to the repo . They are able to impose this by buying and selling securities until they get what they want

#8

Central Bank (like RBI in India) controls Repo (consequently reverse repo). Bank rate ( interbank rate at which Bank lends/borrow to/from each other) takes a cue from it…

Repo auction - Selling of bonds with the intent of buying it back. (Hence collateralized)