Reverse Repo

Reverse Repo
Reverse repo includes buying of securities with a potential to sell the securities at a high cost in the future. For the purchaser of securities, this is regarded as a way of lending money and gets payment with interest in future. These securities play the role of collateral for loan. Conversely, as far as the seller of securities is concerned, itis defined as a method to exchange money and pay the interest in the upcoming days. Such type of agreement is regarded as the financial toolgenerally used to increase temporary capital. Typically, Central bank use agreements of reverse repo for draining the reserves in banking system prior to add them in the future. For example, Fed utilizes a reverse repo for selling the securities by exchanging us Dollars to mop up extra liquidity in markets.