By Moorad Choudhry
The Repo markets have grown dramatically long ago few years due to the have to hedge brief positions within the capital and derivatives markets. nearly all significant foreign money markets on the earth now have a longtime repo industry, the power is additionally more and more getting used in constructing forex markets besides.
This ebook is a realistic creation that specializes in the tools, purposes and hazard administration ideas crucial for this swiftly evolving marketplace. totally up to date to mirror the alterations in those markets, the booklet additionally comprises labored examples and case stories, and new sections on basket and dependent finance repo.
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Extra info for An Introduction to Repo Markets
55. 76, which rounded to the nearest DKK 1 million becomes DKK 330 million nominal of the 7% 2007. In a bonds borrowed/collateral pledged trade, both securities are delivered free of payment and ABC Bank plc would pay the customer a 40-basis points borrowing fee upon termination. In our example the fee payable would be: 338; 100; 000 Â 31 0:4 Â ¼ DKK 112,700 360 100 Cross-currency repo All of the examples discussed so far have used cash and securities denominated in the same currency; for example, Bunds trading versus euros cash, and so on.
If £100 is invested today (at time t0 ) at 10%, then 1 year later (t1 ) the investor will have £100 Â ð1 þ 0:10Þ ¼ £110. If he leaves the capital and interest for another year he will have at the end of year 2 (t2 ): £110 Â ð1 þ 0:10Þ ¼ £100 Â ð1 þ 0:10Þ Â ð1 þ 0:10Þ ¼ £100 Â ð1 þ 0:10Þ2 ¼ £121 The outcome of the process of compounding is the future value of the initial amount. Therefore we can use the following expression: FV ¼ PVð1 þ rÞn where ð2:1Þ FV ¼ Future value; PV ¼ Initial outlay or present value; r ¼ Periodic rate of interest (expressed as decimal); n ¼ Number of periods for which the sum is invested.
Where the collateral is government bonds, the institution will usually be receiving a higher rate on the CD than the repo rate it is paying in the repo. The use of repo for arbitrage and basis trading will be considered in a later section. MARGIN We introduced the concept of margin in Chapter 1. This is where the market value of collateral is adjusted so that it is greater than the amount of cash being lent. This is to protect the cash lender from a drop in value of the collateral. The size of the margin, also called a haircut, is a function of the quality of the collateral, the volatility of the market and the credit quality of the counterparty.
An Introduction to Repo Markets by Moorad Choudhry