What best describes a repo transaction?

• A. A form of short-term borrowing where securities are sold and repurchased
• B. A long-term loan secured by mortgages
• C. A currency exchange agreement
• D. A stock buyback program

Answer: (A)

Repo transactions are short-term collateralized borrowing where securities are sold with an agreement to repurchase them later at a higher price. The cash lender earns a return through the repo rate, while the borrower raises cash and posts high-quality securities as collateral, typically for a overnight or few-day horizon. This structure makes repos a liquidity tool for banks and dealers, enabling quick funding while keeping the ownership of the securities intact until repurchase. The other options describe different concepts: a long-term loan secured by mortgages is not about selling and repurchasing securities; a currency exchange agreement involves exchanging currencies rather than posting securities as collateral; a stock buyback program is a corporate action where a company buys its own shares, not a collateralized loan arrangement.