How can a repo (repurchase agreement) be used for short-term liquidity, and what are the risks?
A core Corporate Treasury interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
A repo is a sale of securities with an agreement to repurchase them at a set price on a future date — economically a secured (collateralized) loan: the cash borrower sells high-quality securities (e.g., government bonds) for cash and repays with interest (the repo rate) to get them back, while the cash lender holds the collateral with a haircut. For a treasurer holding eligible securities, repo is a cheap, flexible source of short-term cash (cheaper than unsecured borrowing because it's collateralized) and, on the other side, a low-risk way to invest surplus cash (reverse repo). Risks: collateral/market risk (the securities' value falls, prompting margin calls — managed by haircuts and daily margining), counterparty risk if the other side defaults (mitigated by the collateral, but with re-pricing/liquidation risk), rollover/funding risk if you rely on short-term repo that can't be rolled in stress (a classic run dynamic — repo markets froze in 2008), and operational/legal risk around collateral title and rehypothecation. So repo is efficient secured funding but introduces collateral-management and rollover risks that must be controlled.
WHAT INTERVIEWERS LISTEN FOR
- ✓Sell securities + agree to repurchase = collateralized short-term loan
- ✓Cheaper than unsecured (secured by high-quality collateral, with haircut)
- ✓Reverse repo invests surplus cash at low risk
- ✓Risks: collateral/margin, counterparty, rollover (run risk), operational/legal
COMMON MISTAKES
- ✗Treating repo as an outright sale
- ✗Ignoring rollover/run risk
- ✗Not knowing haircuts/margining manage collateral risk
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