Mark-to-Market Valuation of a Buy-Sell-Back Trade
Summary
The document explains a buy-sell-back as a collateralized loan structured through a security sale followed by a forward agreement to sell the security back. The borrower receives cash against a bond or other security, while the lender holds the collateral and earns compensation for lending. The arrangement is described as economically similar to a repo, though the legal structure and treatment of cash flows from the collateral can differ.
When the contract dates and prices are already specified, the mark-to-market is obtained by valuing the contracts’ future cash flows at present value. If the future repurchase price must instead be determined, valuation may require a more involved model, including consideration of the collateral’s potential fire-sale value if the borrower defaults. The discussion notes that buy-sell-backs are more common in emerging markets, while repos are more common in developed markets. It gives no numerical example or full pricing formula, and the fair-price calculation depends on contractual terms, collateral cash flows, and credit or liquidation assumptions.
Key ideas
- A buy-sell-back combines an initial security sale with a forward agreement to repurchase the collateral.
- The transaction functions economically as a collateralized loan.
- For specified contract prices and dates, mark-to-market valuation uses the present value of future cash flows.
- Collateral income may be incorporated differently from the pass-through payments used in some repo agreements.
- Estimating a fair repurchase price may require modeling default and collateral liquidation value.
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Full text
# How to calculate the MTM of a buy-sell-back # How to calculate the MTM of a buy-sell-back How do I calculate the MTM of a buy sell back trade? I know a BSB can be seen as buying a bond now and shorting a bond forward. I need help with deriving the formula for the MTM, with an example if possible. ## Answer by Dimitri Vulis (score 1) https://quant.stackexchange.com/a/85509 A buy/sell back is a slight variation of a repo. It's used more often in emerging markets than the very similar kinds of repurchase agreements more common in developed markets. Economically, they're all collateralized loans. The borrower owns a security, such as a bond, and wants to borrow money from the lender. The lender wants to lend money to the borrower, to get paid for doing this, and to keep the borrower's security if the borrower fails to repay the loan. Legally, you have two contracts: at time $T_0$, the borrower sells the security $B$ to the lender for the price $P_0$; and, as you said, a forward agreement, the lender promises to sell back the collateral to the borrower at future time $T_1$ for the price $P_1$. If the collateral pays anything (bond coupons, stock dividends) while the lender owns it, then the sell back price is adjusted for it at the end, which is the main difference from the "developed markets" repo. In contrast, under the developed markets standard Global Master Repurchase Agreement, the moment the lender - legal owner of record - receives any cash flow, the lender must immediately send a pass-through manufactured payment to the borrower, who keeps the economic benefits of the collateral, rather than wait until the repurchase. So if you are already told all these times and prices, then you simply take the present value of the future cash flows, and that's the fair value (mark to market) of the contracts that comprise the BSB. But if you need to figure out what would be the fair price $P_1$, then you may need a fairly complicated model, that might consider, for example, how much the lender might get for the collateral at a "fire sale" price, if the borrower fails to buy it back. Please see, for example, Wujiang Lou. Repo Haircuts and Economic Capital: A Theory of Repo Pricing.
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