How is exactly a repo functionning?
When I enter in a reverse repo, I give C1 cash at t1 against a bond/asset. At t2 I'll return the bond and get C2>=C1 (GMA).
Is the next structure correct?
Before the repo:
BS:
Assets=Cash=C1
(Liabilities=Equity=C1)
During the repo:
BS:
Assets: Claim C(t)=C1*(1+R(t2-t)), with R=(C2-C1)/(t2-t1)=repo rate
(Liabilities=Equity=C(t))
Off BS:bond-MV(t)
Where is the margining entering? Say it is cash.
And what is the (net) present value of the bond I have been transffered, at moment t? (in practice, it's present value is C2)
Hope that somebody could help
I am interested in both the market and the credit risk of such an instrument.
Have you checked Fabozzi? I am pretty sure I've read about it there.
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