Question

Which of the following correctly describes a repurchase agreement? The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price The sale of a security with a commitment to repurchase the same security at a future date left unspecified, at a designated price The purchase of a security with a commitment to purchase more of the same security at a specified future date

Answer 1

Answer:

The correct answer is A: The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price

Explanation:

A repurchase agreement (Repo) is a short term agreement between two parties in which one party sells the other party security (usually government securities) at a price with an agreement to repurchase the exact same security at a fixed time and price. The maturity for a repurchase agreement can be from overnight to a year. The

Repurchase agreements are generally considered safe investments because the security in question functions as collateral, which is why most agreements involve U.S. Treasury bonds. The transaction allows the dealer to raise short term capital. It is a short term money market instrument in which two parties agree to buy or sell a security at a future date.