大浩浩的笔记课堂——FRM考试学习笔记121

Topic 50 Repurchase Agreements and Financing

1.Repurchase agreements:structure and uses

⑴repurchase agreement(repo):

①definitions:

A.It is a contract in which a security is traded at some initial price with the understanding that the trade will be reversed at some future data at some fixed price.

B.They are bilateral contracts where one party sells a security at a specified price with a commitment to buy back the security at a future date at a higher price.

②factors:

A.short-term loan:

It is secured by collateral.

B.implied interest:

It is the difference between the sell and buy prices of the security.

③perspectives:

A.from the perspective of the borrower:

a/ bond financing:

Repos offer relatively cheap sources of short-term funds or long financing.

b/ liquidity management(balancing the cost of funding and other sources of funds):

Repos offer secured short-term financing and its financing is cheaper but less stable.

B.from the perspective of the lender:

a/ cash management(reverse repo as investment vehicles):

Reverse repos offer a low risk,collateral-secured investment opportunity.

b/ short position financing(reverse repo as financing vehicles):

Lenders may also use reverse repo to finance short positions in bonds.

④formula:

Repo price at termination(Repos are valued based on a simple time value of money calculation):

⑵repos and cash management from lender´s perspective:

①lender:

money market mutual fund industry+municipalities

②liquidity:

overnight

③safety:

highest credit quality collateral

·特别注意！

·posting collateral→credit risk

·collateral haircuts→liquidity risk

2.General and special repo rates:

⑴repo trades:

①categories:

A.using general collateral(GC)→GC rate

a/ The GC rate is typically close to,but below the Federal funds rate.

b/ The Fed funds-GC spread is widen:

△the decreasing supply of treasury collateral

△during times of financial stress

B.using special collateral or specials→special rate

Every special rate is typically less than the GC rate.

②summary:

·特别注意！

·special collateral rate<general collateral rate<Fed funds rate

⑵special spreads:

①definition:

It is the differences between the GC rate and the special rate for a particular security and term.

A.GC rate→suit repo investors,funding trades

B.special rate→short particular securities

·特别注意！

·The popularity of OTR issues as special collateral resulted in lower repo rates and wider special spread.

②special spreads in the United States and the auction cycle:

A.categories:

a/ on-the-run(OTR):

The most recently issued bond of a given maturity:

△second most recently→old issue

△third most recently→double-old issue

b/ off-the-run(OTF):

They are all other issues.

B.formula:

special spread=the GC rate-the respective bond repo-rates

C.characteristics:

a/ Special spreads are quite volatile on a daily basis depending on the special collateral.

b/ Special spreads can be quite large.

c/ Special spreads do attain higher levels over some periods rather than others:

OTR special spreads are generally narrower(smaller) immediately after an auction but wider before auctions.

d/ Spreads fluctuate over time:

The cycle of OTR special spreads are far from regular.

③special spreads in the United States and the level of rates:

A.Special spreads move within a band that is:

The special rate should never be less than 0%,the special spread should not exceed the GC rate.

B.The special spread can also be tied to the penalty for failed trades.

C.As a result,the penalty rate becomes the new upper limit for the special spread.

3.Counterparty risk and liquidity risk in repo transactions:

⑴counterparty risk:

①definition:

It is the risk of borrower default or not payment of its obligations.

②reason:

Counterparty(credit) risk is less of a concern,because repos are generally very short-term transactions secured by collateral.

③factor:

posting collateral

⑵liquidity risk:

①definition:

It is the risk of an adverse change in the value of the collateral.

②factors:

collateral haircuts,margin calls,short repo term,higher quality collateral

4.Case study:Repos during the credit crisis:

⑴repos during the credit crisis:

As the crisis escalated,lenders were reluctant to continue to accept these securities,and were increasingly demanding higher quality collateral and larger haircuts.

⑵repos and Lehman Brothers:

Borrowers want to extend the term of their repo borrowings.Lenders,on the other hand,want to shorten the term of their repo lending in order to minimize exposure to default risk.

⑶repos and Bear Stearns:

The loss of confidence had 3 related consequences:

①Prime brokerage clients withdrew their cash and unencumbered securities rapidly.

②Lenders declined to roll over or renew repo loans.

③Counterparties to non-simultaneous settlements of foreign exchange trades refused to pay until Bear Stearns paid first.

大浩浩的笔记课堂之FRM考试学习笔记合集