Repurchase agreement (Repo)

A contract to sell and subsequently repurchase securities at a specified date and price. The net effect is a short-term exchange of securities for cash. Trades are driven by either a desire to borrow or lend cash on a collateralised basis, or the desire to borrow or lend the underlying securities using cash as collateral. Repos are usually overnight investments. The investor deposits cash with a financial institution and the financial institution sends collateral, usually a treasury or government security, to the investor. Also known as an RP or buyback agreement. The associated interest rate is the ´repo rate´.