Courses on Khan Academy are always 100% free. Start practicing-and saving your progress-now: www.khanacadem... Mechanics of repurchase agreements (repo transactions/loans) More free lessons at: www.khanacademy...
After 7:00 Actually from borrower's perspective, it is a repurchase agreement (repo) (because he will be repurchasing the watch to settle the transaction) and from the lender's perspective, it is a resale agreement (reverse repo) (because he will be reselling the watch). I suppose Sal used the terms other way round.
I love your films! They are not only suitable for beginners. I am a student of 4th year of finance and accounting and I still find your movies usefull - while revising or to understand some processes that my professors were not able to explain. And this subtle sense of humour... :) "...and this is my gold chain"
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate. The party that originally buys the securities effectively acts as a lender. -wiki
Three Dogs and a Camper Essentially, the Fed is acting as a pawnshop with a very short timeframe for redemption. The usual places for overnight/daily loans were a bit short on liquidity...corporate taxes were due, and new US bonds were hitting the market...cash was scarce but lots of demand so the Fed stepped in as lender of last resort and provided the liquidity. The system worked...
fabian: Seems like both the Bank and the Fed reserve collected interest. The Fed however devalued a set of bank treasuries (the watch) and waited for the Bank to pay back this artificial value, plus some interest. The person with the kidney work pays the most, for the Bank and Feds benefit.
Because they over invested in assets that they thought would appreciate fast which obviously they didn't so now they have to put those assets up as collateral to the fed to cover their cash shortage
Is not it wrong side of balance sheet? When bank sells treasury note to fed with an agreement to repurchase it, should not it be reflected as a repo trasanction, so liability (funding) side?
Sal you have helped me so much on understanding inflation, but can you make a video about deflation. I've written everything out on paper but I don't understand how the Fed cashes in its securites without causing all banks to become insolvent.
There's been some talk online about synthetic CDOs which are apparently of substantial quantity. According to these sources a large number of these synthetic CDOs are about to trigger some type of repurchase if more than 7 of 100 referenced banks fail. At this time 5 banks have failed with 2 or 3 partial failures equaling a total of 6 failures. Have you heard of these? My interest is in what the repurchase would mean. Do the owners of these have to rebuy or simply lose their investment?
This video is very helpful for a beginner like me. Can you also create a video where haircuts and margins are applied. I heard that that Haricuts means purchasing an item lower than it's value, say from $100, you purchased it at $90. My question is that when the item was purchased back,what will be the value of item? Is it $100 + interest or $90 +interest. Thank you
I think the Fed delivers Reserves, not cash. Reserves do not pay interest but allow the Bank to lend more money. When the bank lends money the money is created
Sal, I understand that you have degree in CS. Are you planning to do any tutorials on Java programming? I would love for you to do some videos on introductory topics. Thanks
So is the discount rate the same as the reverse repurchase rate in the case that a commercial bank borrows money from the Fed under repurchase agreement?
one doubt, in repo loan, the gov securities are 1. sold and repurchased or 2. pledged, the ownership is transferred to central bank or retained by the bank themselves, and interest on gov securities is collected by whom the central bank or the bank itself, suppose if the ownership is transferred to the central bank then the interest is collected by central bank and after repurchase will the central bank return those interest to the bank or not, in case of pledging the interest payments are collected by bank i have no doubt on that, can anyone explain this soon ??
In this case, what happens if the watch between the lender and lendee is damaged? Would the lender have any incentive to keep the watch at its original condition, since it technically owns the watch for a period of time?
For example, would the Fed only "lend" the bank $10M if the bank gave them, say, $11M in treasury bonds? or does the Fed not require excess collateral value?
I'm assuming the buyer would require more "collateral" than the amount he is "lending out." Correct me if I'm wrong. Does the Fed require the bank to give more collateral than the amount that they lend the bank? Thanks.
