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In the scenario discussed, Bank A requires cash quickly and possesses bonds, while Bank B has excess cash to invest. Bank A enters a repurchase (repo) agreement with Bank B, where it sells its bonds to Bank B with an agreement to repurchase them at a later date, typically the next day, for a higher price. This transaction allows Bank A to obtain the cash it needs, and Bank B profits from selling the bonds back. From Bank A's perspective, this is a repo, while from Bank B's viewpoint, it is a reverse repo. Various entities, including banks, mutual funds, hedge funds, and central banks, utilize repo transactions as a financial strategy.
