Mr. Robinhood. « What are the near and far legs in a buyout contract? » Access on August 14, 2020. As noted above, it takes the most high-end assets as securities that are the main feature of a pension. However, if a borrower does not repay the loan, the lender may suffer losses because the sale of the security may not be able to recover the total amount of the loan. In this sense, haircuts are generally granted under rest agreements in which the borrower provides guarantees that are more valuable than the loan. In addition, in renus account agreements, there are marginal appeals in which cash borrowers provide additional collateral when the value of the guarantee decreases. Like many other corners of finance, retirement operations contain terminology that is not common elsewhere. One of the most common terms in repo space is « leg. » There are different types of legs: for example, the part of the retirement activity that originally sells security is sometimes called « starting leg, » while the subsequent buyback is the « close leg. » These terms are sometimes replaced by « Near Leg » or « Far Leg. » Near a repo transaction, security is sold.
In the long-distance room, it is redeemed. Pension transactions are generally seen as an instrument to reduce credit risk. The biggest risk in a repo is that the seller does not maintain his contract by not repuring the securities he sold on the due date. In these cases, the purchaser of the guarantee can then liquidate the guarantee in an attempt to recover the money he originally paid. However, the reason this is an inherent risk is that the value of the warranty may have decreased since the first sale and therefore cannot leave the buyer with any choice but to maintain the security he never wanted to maintain in the long term, or to sell it for a loss. On the other hand, this transaction also poses a risk to the borrower; If the value of the guarantee increases beyond the agreed terms, the creditor cannot resell the guarantee. At what price can the counterparty buy back the loan? An open pension contract (also called on demand) works in the same way as an appointment period, except that the trader and counterparty accept the transaction without setting the due date. On the contrary, trade can be terminated by both parties by notifying the other party before an agreed daily period. If an open deposit is not completed, it is automatically crushed every day. Interest is paid monthly and the interest rate is reassessed by mutual agreement at regular intervals. The interest rate on an open pension is generally close to the federal rate.
An open repo is used to invest cash or finance assets if the parties do not know how long it will take them. But almost all open agreements are concluded in a year or two. For example, if a hedge fund wants to sell some DBR 4s, the loan will be short and therefore, to make it available, it will be borrowed from another location. In short, according to a hedge fund, there will be a reverse buyback involving the liquidation of securities. The difference between the borrowed price and the redeemed price is the amount of interest the borrower pays to the lender. This can be calculated under the following formula: under a pension contract, the Federal Reserve (Fed) buys U.S. Treasury bonds, U.S. agency securities or mortgage-backed securities from a primary trader who agrees to buy them back within 1 to 7 days; an inverted deposit is the opposite.