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Bank A, needing cash quickly, engages in a repurchase (repo) agreement with Bank B, which has excess cash. In this arrangement, Bank A (the dealer) gives its bonds to Bank B and agrees to repurchase them at a later date—often the next day—at a higher price. This transaction provides Bank A with the needed cash and allows Bank B to earn profit. From Bank A's viewpoint, this is a repo; from Bank B's perspective, it’s a reverse repo, as they anticipate selling the bonds back for a profit. Repo agreements are utilized by various entities, including banks, mutual funds, hedge funds, and central banks, to manage cash flow and investment strategies.
