A repurchase transaction (repo) occurs when the borrower âsellsâ a security to a lender while agreeing to buy it back at a future date for a slightly higher price. The higher price will function as the âinterestâ on the loan. The repurchase âsaleâ will occur at below the assetâs market value to provide a further hedge for the lender against price moves1.
A Repo transactions allow actors (often hedge funds) to take on leverage by putting up a small amount of collateral for the short term loan
1. Wang, J. J. Central Banking 101. (Joseph, 2021).