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Bank A needs quick cash and has bonds as assets. Bank B has excess cash and wants to invest it. To facilitate this, Bank A engages in a repurchase (repo) agreement with Bank B. In this arrangement, Bank A, the dealer, sells its bonds to Bank B while agreeing to buy them back later, typically the next day, for a slightly higher price. Bank B receives cash and earns a profit when Bank A repurchases the bonds. From Bank A's perspective, this is a repo transaction, while for Bank B, it's a reverse repo, as they intend to sell the securities back at a profit. Repo transactions are viable options for various entities, including banks, mutual funds, hedge funds, and even central banks.
