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In a repo agreement, Bank A, needing cash quickly, sells its bonds to Bank B, which has excess cash. Bank A (the dealer) agrees to repurchase the bonds at a later date, often the next day, providing Bank B with the liquidity it needs. When Bank A buys back the bonds at a higher price, it benefits by securing immediate cash, while Bank B profits from the difference in price. This transaction is termed a repo from Bank A's perspective and a reverse repo from Bank B's view. Repo transactions are common among various financial entities, including banks, mutual funds, hedge funds, and central banks, as a means to manage liquidity efficiently.
