From the point of view of expected return to the repo provider, you will get better expected return when you get more collateral (compared to the value of the money you lent - say if you get 120% stock collateral that’s a better repo margin than 102% collateral). The better quality and more amount of collateral, the better your repo margin in general.
I’m not sure exactly what they mean when they say that the supply of collateral decreases.
If they mean that the borrower posts less collateral, then the margin should increase.
If they mean that the borrower posted some (fixed) amount of collateral and that the supply of that collateral in the overall market (outside what was posted) decreases, that should make the collateral more valuable and, therefore, the margin should decrease.
I suspect that they meant the latter, but it’s far from being crystal clear.
I think supply of collateral here means that the supply of the product in the market has decreased and hence the demand has increased. In such a scenario the repo margin would reduce making C the ans
Why would a decrease in supply result in an increase in demand?
I don’t recall that from any of the Econ readings.
My bad the demand will not reduce it would remain constant. Assume the supply of oil is reducing and the demand is constant, the price of oil would increase ( current market scenario. Now if someone actually gives you oil as collateral which is a priced asset right now you would reduce the repo margin since the commodity is highly sought after in the market