ACCA Financial Management (F9) Certification Practice Exam

What is a Reverse Repurchase Agreement?

1. An agreement to sell securities without a promise to buy back

2. A purchase of securities with a commitment to resell later

3. A long-term loan secured by collateral

4. A commitment by a bank to fund commercial paper

The correct answer is: A purchase of securities with a commitment to resell later

A reverse repurchase agreement, commonly known as a reverse repo, involves a purchase of securities with the commitment to resell them later at a predetermined price. This transaction typically occurs between financial institutions and is a key part of liquidity management. In a reverse repo, one party (often a central bank) buys securities from another party (such as a commercial bank) and agrees to sell them back at a specified future date. This arrangement allows the seller of the securities to obtain cash temporarily, while the buyer holds the securities as collateral until the transaction is reversed. This mechanism is often used to manage short-term funding needs and liquidity in the financial markets, making it an essential tool for monetary policy implementation. In summary, the reverse repurchase agreement facilitates temporary funding while allowing the buyer to secure assets for future resale.