A state transfers cagh to a broker and the broker transfers securities to the state, promising to repay the cash plus interest in exchange for the…

Definition of a Repurchase Agreement (Repo):

A repurchase agreement is a short-term financial transaction where one party sells securities to

another with an agreement to repurchase them at a later date for a specified price, which includes

interest. It functions as a secured loan.

Transaction Description:

The state transfers cash to a broker.

The broker provides securities as collateral and agrees to repay the cash plus interest in exchange for

the return of the same securities.

This arrangement matches the definition of a repurchase agreement.

Explanation of Answer Choices:

A . Arbitrage agreement: Arbitrage involves exploiting price differences in markets, unrelated to this

transaction.

B . Repurchase agreement: Correct, as it fits the definition.

C . Mutual buy-sell agreement: This involves agreements to buy and sell assets, unrelated to this

financial transaction.

D . Reverse repurchase agreement: Incorrect, as the state would be the borrower, not the lender, in a

reverse repo.

Reference:

U.S. Department of the Treasury, Guide to Federal Investments.

Financial Accounting Standards Board (FASB), Accounting for Repurchase Agreements.