Repurchase Agreement (Repo)

A repurchase agreement, or repo, is a short-term borrowing arrangement in which one party sells a security to another party with an agreement to repurchase the security at a later date, typically at a higher price. The repurchase price includes interest, effectively making the transaction a short-term loan secured by the underlying asset. Financial institutions commonly use repos to manage liquidity or obtain short-term financing while temporarily parting with high-quality securities, such as government bonds.

Example

A bank sells Treasury bonds to another bank under a repurchase agreement, agreeing to buy them back at a higher price the next day, providing the selling bank with short-term liquidity.