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In a scenario where Bank A urgently needs cash and possesses bonds, Bank B, which has surplus cash, can engage in a repurchase (repo) agreement with Bank A. In this transaction, Bank A (the dealer) sells its bonds to Bank B and agrees to repurchase them at a later date, typically the next day, at a higher price. This allows Bank A to obtain the cash it requires, while Bank B earns a profit from the price difference. From Bank A's perspective, this is a repo transaction, while for Bank B, it's a reverse repo, as they buy securities to sell them back for a profit. Repo transactions are utilized by various entities, including banks, mutual funds, hedge funds, and central banks.
