A Repurchase Agreement, also known as a repo, is a financial transaction in which one party agrees to sell a security to another party and simultaneously agree to repurchase the security at a later date for a higher price. The party that sells the security is known as the "seller" or the "cash borrower," and the party that purchases the security is known as the "buyer" or the "cash lender."The difference between the initial sale price and the repurchase price is the profit earned by the buyer or the cost of borrowing cash for the seller. Repos are typically used as a short-term source of financing, and the security being sold is usually a highly liquid and highly rated bond.There are two types of repos: -1- A "regular" repo is a transaction in which the seller agrees to repurchase the security at a later date for a higher price.2- A "reverse" repo is the opposite of a regular repo, where the buyer agrees to sell the security at a later date for a lower price.Some of the risks associated with repos include counterparty risk, liquidity risk, and credit risk. Counterparty risk is the risk that the other party to the transaction will default on their obligation. Liquidity risk is the risk that the security being sold in the repo will not be able to be repurchased at the agreed-upon price. Credit risk is the risk that the counterparty will not be able to meet their financial obligations.
