CFM46120 - Deemed loan relationships: repos: general collateral repos: examples
Example of a general collateral repo
| - | Shares/gilts/bonds | - |
|---|---|---|
| - Original Owner | - | Interim Holder |
| Day 1 | - | - |
| - | £100 million cash | - |
| - | Shares/gilts/bonds | - |
| - Original Owner | - | Interim Holder |
| Day 90 | - | - |
| - | £101 million cash | - |
You can see that the repurchase price is £1m, or 1%, greater than the sales price. 1% for 90 days equates to approximately 4% p.a. on a simple basis. The transaction is in substance a lending one.
Extended example of a standard repo
A (repo seller) enters into repo with B (repo buyer). 1st leg settlement is on 15/4 and the repo is for 28 days (term is on 13/5). The repo rate is 4% and collateral is £60m nominal 8.5% bond with annual coupons payable on 31/12. Clean price of the bond is 107.5 on 15/4. A haircut of 2% is required. The sale and repurchase prices are calculated below.
15 April
- £60 million 8.5% bonds -B
- Cash £65 million - A
Dirty Price of Collateral = (107.5 + (8.5 x105/360))/100 x 60 million = £65.99 million
Haircut @ 2%: cash advance = £65.99 million /1.02 = £64.69 million rounded to £65 million by B for purchase of securities.
13 May
- £60 million bonds
- Cash £65. 2 million
Repurchase Price = £65 million x 4% x 28/360 + £65 million = £65.20 million