CFA Mock 2011 Afternoon Q 50
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Can anyone please tell me if they see the link between the text, question and answer?
The duration of this liability is 0.17 years. The proceeds of the repo agreement would be invested in additional U.K. corporate bonds and the resulting £310 million portfolio would have a duration of 5.82 years. < - - - notice that when you enter a repo, your duration increases thus the term increases = > repo increases.
This is oht Bilal – overhead transmission
In this case, the repo is a liability. So any increase in repo rate would be on the wrong side imo. There may be something else going on here…
This question got me too. Remember, repos are extremely ultra-short term in nature. Their terms are generally overnight, a few days, etc…at most. Just by lengthening the term of the term a few days you could easily double or triple the length of the term which would have a dramatic impact on the overall rate.
then, in this case, has rates increased because of two-month lending as opposed to overnight/daily repos? thanks in advance
Don’t overthink it. A repo rate is positively correlated with the term of the repo.
A 2-day repo rate is higher than a 1-day repo rate. Etc. That’s all the question is asking.
Key: 2-month repo.
Very long, so increase the repo rate.
Delivery part is interesting. Physical delivery lowers repo rate but increase transaction cost.
^ is it because the transaction cost is the paid by the borrower?
sounds like yes, but can’t confirm it with textbook.
for physical delivery - cost has to be incurred to move the collateral to where it can be stored by the custodian (bank) and then provide the repo loan. That cost has to figure in the transactions costs.