Market volatility has investors searching for new and innovative ways to protect their portfolios. One strategy gaining attention is the use of Repurchase Agreements, or "Repos."
In this article, we'll break down what a Repurchase Agreement is, how it works and why it could be a valuable tool for your portfolio. We'll also take a look at some of the riskier aspects of Repos, so you can decide if this strategy is right for you.
What is a Repurchase Agreement?
A Repurchase Agreement, or "Repo," is an agreement between two parties to sell and buy back a security at a predetermined price and date. The seller agrees to sell the security to the buyer, or and then buy it back at a later date. The price of the security is typically set when the agreement is made.
How does a Repurchase Agreement work?
With Repurchase Agreements, we are selling securities to another party (the investor) with an agreement to buy them back at a later date for a higher price. This provides stability in times of market turbulence and offers investors the opportunity to generate income.
Why use a Repurchase Agreement?
There are a few reasons why you might want to include Repos in your portfolio:
To generate income: One of the benefits of Repos is that they offer investors opportunities to generate income while preserving their initial investment.
Fully Collateralised: Bank Deposits are covered under the Depositors Insurance Corporation (DIC) up to $125K, while Repos are fully secured by Government Debt for individuals.
Flexible Investment Terms: Investment terms can be amended to accommodate various clients’ financial needs in terms of rates and tenors.
Higher Returns: Repos generally carry more competitive returns than that of Commercial Bank Deposits.
Are there any risks associated with Repurchase Agreements?
Yes, there are a few risks associated with using Repos:
There is always the risk of default if the issuer is unable to repurchase the security. In this instance, the collateral asset assigned to investor is held at a third party custodian where the investor can retrieve the asset.
The collateral assigned can fall in value; however the issuer is obligated to increase the collateral assigned to the client to cover the value of the repo, with a cushion.
So, should I use a Repurchase Agreement?
That's a decision you'll have to make based on your own individual circumstances. However, Repos can be a valuable tool for your portfolio and offer investors a variety of benefits. If you're interested in learning more about them, contact one of Maritime Capital’s Wealth Creators for more information.