Repurchase agreement (Repo) is a widely used financial instrument in Pakistan`s money market. It is a form of short-term borrowing where the seller agrees to sell a security to the buyer at a fixed price and buy it back at another agreed price and time. The buyer in this transaction is essentially lending money to the seller, who provides the security as collateral. In this article, we will take a closer look at repurchase agreement examples in Pakistan.
Repo transactions are conducted in two ways, namely deliverable and non-deliverable. In deliverable repos, the securities are actually transferred between parties, while non-deliverable repos are conducted using book-entry methods. The latter is more commonly used in Pakistan’s money market.
Let’s consider an example of a repurchase agreement in Pakistan. Suppose that a bank has a need for liquidity for a short term period of 7 days, and the bank has securities worth Rs. 100 million. The bank would then enter into a repo agreement with another financial institution, giving the securities as collateral for the agreement. The two parties would agree on the agreed price and the interest rate to be paid during the 7 day period.
At the end of the 7 day period, the original buying institution would then sell the securities back to the bank at the same agreed price, and the bank would pay the agreed-upon interest rate. The difference between the selling and buying price is the profit earned by the buying institution. This transaction allows the bank to obtain liquidity for its short-term needs without having to sell the securities.
Repurchase agreements are beneficial to both parties involved. The seller (i.e., the borrower) gets access to short-term financing, while the buyer (i.e., the lender) earns a return on their investment. It is also a relatively safe investment as the securities provided as collateral serve as a guarantee for the loan.
In Pakistan, repurchase agreements are primarily conducted between banks, financial institutions, and the State Bank of Pakistan. The State Bank of Pakistan conducts repo transactions with banks to regulate the money supply in the economy. The repo rate set by the State Bank of Pakistan is used as a benchmark interest rate in the country.
In conclusion, repurchase agreements are an important financial instrument in Pakistan`s money market. They provide a means for institutions to obtain short-term financing and offer a safe investment opportunity for lenders. Nevertheless, it is crucial to note the risks involved in such transactions and to ensure that both parties involved fully understand the terms and conditions of the agreement.
