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In a repurchase agreement (repo), Bank A needs cash quickly and owns bonds, while Bank B has excess cash. Bank A, acting as the dealer, sells its bonds to Bank B and agrees to buy them back at a later date, usually the next day, for a higher price. This transaction provides Bank A the cash it needs, while Bank B profits from the trade. From Bank A's perspective, this is a repo, whereas for Bank B, it is a reverse repo, as it involves purchasing securities with the plan to sell them back for profit. Repo transactions are utilized by various entities, including banks, mutual funds, hedge funds, and central banks.
