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Implied Repo Rate

The implied repo rate is the theoretical interest rate at which an investor can earn by buying a security (such as a bond) in the cash market and simultaneously selling it in the futures market. It represents the cost of carrying the asset until the delivery date of the futures contract. The implied repo rate is used by traders in arbitrage strategies to evaluate the profitability of buying the asset in one market and selling it in another.

Example

A trader calculates the implied repo rate by comparing the cost of buying a Treasury bond and the price of selling a futures contract on the same bond, determining whether there is an arbitrage opportunity.

Key points

• Theoretical interest rate earned by buying an asset in the cash market and selling it in the futures market.

• Used in arbitrage strategies to assess profitability.

• Reflects the cost of carrying an asset until the futures contract delivery date.

Quick Answers to Curious Questions

Traders use it to identify arbitrage opportunities by comparing the cost of carrying an asset with the potential returns from selling it in the futures market.

Factors include the asset’s price in the cash market, the futures market price, interest rates, and the cost of financing the position.

It helps traders determine whether there is a profitable spread between the cash and futures markets, allowing for risk-free or low-risk arbitrage trades.