This is from the solution in Schweser Exam 2, Afternoon Session, Question 13.5 (Page 106). Two guys are discussing if using hot issues like on-the-run Treasuries will lower the repo rate. I understand that the use of collateral by the borrower lowers the rate at which he needs to borrow, but what do they mean by the phrase “Limited Ability” collateral? Is Schweser saying that limiting the collateral lowers the repo rate more than having liquid collateral? That doesn’t make sense. Why sould the lender give you a lower rate for having s**t collateral than he would if you have great collateral?
it’s an error - it’s meant to say “limitied availability” terefore making te collateral “worth more” and lowering te repo rate
It is counter intuitive isn’t it? Hot collateral should have higher rate because demand is more ?!!!
Hot collateral will have lower rate as supply is less and demand is more
s**t collateral means the dealer is likely to lower your rate because of fear that you might not repay at a higher rate…yes, it does seem counterintuitive, but this is how it is in the text, so know it.
“Hot” means in ‘high’ demand - so if the collateral is in demand - everyone wan’t to get a piece of it. So the repo rate should be LOW.