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Bank A needs cash quickly and owns bonds, while Bank B has excess cash to invest. Bank A engages in a repurchase agreement (repo) with Bank B, where it sells the bonds to Bank B with an agreement to buy them back shortly after, usually the next day. In this transaction, Bank B provides the cash to Bank A. When Bank A repurchases the bonds at a higher price, it effectively secures the cash needed, while Bank B earns a profit from the transaction. From Bank A's perspective, this is a repo, while for Bank B, it is a reverse repo. Repo transactions are commonly utilized by banks, mutual funds, hedge funds, and even central banks as a financing option.
