repo

Definition

Repurchase agreement where a seller of a security agrees to buy it back from a buyer (investor) at a higher price on a specified date. These agreements are in effect loans (or short term swaps) between investors to sellers (the difference between the buying and selling prices being the investors' earnings), and are used usually for raising short term finance by banks and corporations. Repos are used also by the central banks as instruments of monetary policy. To temporarily expand the money supply, a central bank decreases the discount rate (called repo rate) at which it buys back government securities from the commercial banks, to contract or maintain the money supply it increases the repo rate. See also open repo and reverse repo.