Repo and Reverse Repo: Borrowing and Lending Perspectives

Summary

The document clarifies why repo and reverse repo can refer to opposite sides of the same collateralized transaction. A party that delivers a bond and receives cash is commonly said to repo out the bond; economically, that party is borrowing cash against the security. The counterparty provides cash and receives the bond, so it is lending against collateral and describes the trade as a reverse repo.

This perspective distinction resolves the apparent contradiction between repo and reverse repo naming, but it does not establish that quoted repo and reverse repo rates must always match in market practice. The question mentions a book’s claim that financing a long security position can cost more than lending cash, while the short answer explains transaction roles rather than rate conventions, market frictions, or why observed rates may differ. The explanation is therefore a basic terminology guide, not a detailed treatment of funding markets.

Key ideas

• A repo and a reverse repo describe opposite perspectives on the same collateralized exchange.
• The party receiving cash against a bond is borrowing and may call the transaction a repo.
• The party lending cash and receiving the bond as collateral may call it a reverse repo.
• The explanation clarifies transaction roles but does not account for differences in quoted market rates.

Tags

# repo rate v.s. reverse repo rate


# repo rate v.s. reverse repo rate












From a book, I read that the repo rate is usually higher than the reverse repo rate. i.e., the rate of financing a long security position is higher than the rate to lend cash using securities as collateral.

However, people also say the opposite side of a repo transaction is reverse repo, i.e., from the repo seller point of view, it is a repo transaction, but from a repo buyer point of view, the same transaction is a reverse repo transaction.

If this is this case, shouldn't repo rate exactly the same as reverse repo rate?

## Answer by JoshK (score 3, accepted)

https://quant.stackexchange.com/a/48809

For every repo there is a reverse repo. It's like in options, for every conversion there is a reversal.

When people say "I am going to repo out a bond" they mean to exchange bond for cash. Essentially repoing=borrowing.

When they talk about reverse repo they they mean giving out cash and getting the bond. Reverse repo =RRP=Lending money

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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