Legal Definitions - repurchase agreement

A repurchase agreement, also known as a repo, is a type of short-term loan agreement between two parties. In this agreement, one party sells a security to another party with a promise to buy back the security on a specified date at a specified price.

For example, let's say Company A needs some cash for a short period of time. Company A can sell some of its securities to Company B with a promise to buy them back in a week at a slightly higher price. This way, Company A gets the cash it needs, and Company B earns a profit on the transaction.

Another example is when a bank needs some cash to meet its reserve requirements. The bank can sell some of its securities to another bank with a promise to buy them back at a later date.

Repurchase agreements are commonly used in the financial industry to raise short-term funds. They are considered low-risk investments because they are collateralized by securities. If the borrower defaults on the loan, the lender can sell the securities to recover their money.