Choosing a Discount Curve to Value a Repo

Summary

The document considers which discount rate to use when valuing a repurchase agreement through discounted cash flows. It contrasts a general risk-free curve, such as overnight indexed swap or fed funds rates, with a market repo curve. The response argues that the discount rate should reflect the risk of the repo asset and points to the applicable side of the repo rate for the remaining agreement term, depending on whether the position is a repo or reverse repo.

It also describes why mark-to-market valuation may receive limited attention in practice: these trades are usually short term and often held to maturity. Bid-ask costs can put a position below its entry value immediately, while substitutable collateral may reduce the need to unwind. The discussion is qualitative and brief; it does not derive a valuation framework or address detailed collateral, counterparty, funding, or accounting conventions. Special collateral and liquidity needs can change the practical considerations.

Key ideas

• Repo discounting should reflect the risk characteristics of the agreement.
• The response points to the relevant bid or ask repo curve for the remaining term.
• Short maturities and hold-to-maturity practice can limit attention to interim mark-to-market changes.
• Collateral substitutability and liquidity needs affect whether a repo is unwound.

Tags

# Present Value for a Repo


# Present Value for a Repo












I am revaluing a repo with discounted cashflows (DCF) approach. I have a question regarding the discount rate to be used to bring the cashflows to present value.

Should it be a risk-free rate like OIS/FedFunds discounting? OR Should it be a market repo rate curve for discounting? OR something else?

## Answer by AlRacoon (score 1)

https://quant.stackexchange.com/a/83913

It would seem to me that one would use a discount rate that is reflective of the risk of the asset--which in this case would be the opposite side (bid or ask depending on whether you are reverse repo or repo) of the repo rate for the remaining term of the repo agreement.

Given the short term nature of these trades, these are generally held to maturity of the repo agreement and consequently not much attention is made to the mark to market. Of course the minute one puts the trade on, they will be underwater by at least the bid-ask spread but as they are held to maturity and short term in nature, they will be rarely liquidated. Unless the collateral is "special", there will generally be substitutability of the collateral and will generally only be liquidated if the collateral is sold or the trade needs to be unwound for liquidity or cash flow reasons.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.