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In a scenario where Bank A needs cash quickly and possesses bonds, while Bank B has excess cash, Bank A can engage in a repurchase agreement (repo). In this arrangement, Bank A (the dealer) sells its bonds to Bank B and agrees to repurchase them at a later date, often the next day, for a higher price. Bank B provides the cash needed by Bank A, and when the time comes, Bank A buys back the bonds at a profit for Bank B. From Bank A's perspective, it's a repo transaction, while for Bank B, it's a reverse repo, intending to sell the securities back at a profit later. Repo transactions are options not just for banks, but also for mutual funds, hedge funds, and even central banks.
