FISM

1. Repo Transaction Example
SBI is having 6.10% GS 2031 (12-Jul-2031) as on 10-Oct-2021 and
wants to do a Repo for 25 days for 50CR. SBI is willing to pay 3.5%
as the Repo interest / yield. The security will no longer be SLR
security for SBI as it is an encumbered security. The Bond is
trading at 6.48% in the market.
•
Citi has sufficient cash and wants to lend funds to SBI against the
security. Citi will take the security as the collateral and it will be
treated as SLR security for Citi. Citi has a right to reuse the
security for selling / for delivery / for Re-Repo as well as can put
this security with RBI for LAF funding. IF Citi reuses this security,
then Citi will lose the SLR status.
•
Interest rate risk (Bond price may change due to increase in
interest rate) is always with SBI as it is the owner of the security.
The value of the collateral will come down and hence the lender of
funds may charge Margin (for 2% margining, the security will be
valued as Money Value/(1.02))
•
Find out the price for the security (Remember here => we follow
30/360E => every month is considered as 30 days and year is 360.
Bond is divided into 2 parts - Asset (Clean price goes to Balance
sheet) and accrued interest (AI goes to Income Statement)
○
Clean price (quote /trade price)
Formula = ((Cash Coupon / Yield %) *(1-1/(1+R%/2)^(2*time
to mat in years)) +100 (FV)/(1+R%/2)^(2*time to mat in
years)
Time 10-Oct-2021 is deal settlement date
□
Next coupon Date = 12-Jan-2022
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Day = Oct (30-9)+30+30+11=92 days remaining for coupon
to receive
□
Days elapsed for coupon =180-92 = 88 days
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FISM7 - 31/11/2021
29 October 2021 04:17
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2. Days elapsed for coupon =180-92 = 88 days
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AI- L1= 6.10/360 * 88 = 1.4911
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Time to next coupon = 92 / 360 = 0.2556
□
Time till Maturity = 9.50 + 0.2556 = 9.7556
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Value1 = (6.10 /6.48%) = 94.1358
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Value 2 = (1 - 1/(1+6.48%/2)^(2*9.7556) = 0.4632
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Value 3 = (100/(1+6.48%/2)^(2*9.7556) = 53.6796
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Total Value (CP) = (94.1358*0.4632) + 53.6796 = 97.2833
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Dirty Price = 97.2833 + 1.4911 = 98.7744 (Settlement Price /
Invoice price)
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Total Repo Amount = 500000000*98.7744/100 = 493872000
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SBI will receive 493872000 from Citi.
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If both the entities agree for a 2% margin, then the value
will change to 493872000 / 1.02 = 4.8419E8 =484190000
□
Citi will receive the Bond 6.10% GS 2031 50CR FV => This
is called the First Leg transaction or Ready Leg
Transaction. Typically you will see this transaction in a
market tracker but the reversal of this deal on the maturity
of repo date will generally be not seen but will
automatically get debited and credited by the settlement
agency. On Ready leg, SBI will debit Asset A/c and adjust
Income statement with AI.
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Repo period is 25 days
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Maturity date = 10-Oct-2021+25 = 04-Nov-2021.
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Repo being short term, it uses money market convention =>
Act / 365 (Oct 21 days + 4 days of Nov)
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Repo interest = 493872000 * 3.5% *25 / 365 = 1.1839E6 =
1183940
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Forward Leg settlement Date is 04-Nov-2021
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Total Repayment = 493872000 + 1183940 = 495055940
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Citi will get 495055940 from SBI and return the security.
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3. Citi will get 495055940 from SBI and return the security.
□
When the security enters the SBI khata, it will be valued on
04-Nov-2021. Since, we know the coupon, we know the
applicable AI to be put back in SBI Income statement.
□
At re-entry (Reversal / Forward leg), Dirty Price =
(495055940 /500000000) * 100 = 99.0112
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AI -L2 = (88+24) * 6.10/360 = 1.8978
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CP = 99.0112 - 1.8978 = 97.1134 vs 97.2833 when it left my
system
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Book Loss = (97.2833 - 97.1134)*500000000/100 = 849500.0
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Any Loss is Tax-deductible
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Suppose, we would have charged a margin of 2% => our
implied CP = 99.0112
□
AI (as interest is paid semi-annually, there will Accrued interest
on aby Bond when the Bond is traded between two interest
payment dates.
Dirty Price (settlement price / Invoice price)
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Repo is always calculated till 8th decimal value
▪
Bond is quoted upto 4 decimal value in Outright market
▪
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Repo & Short Sell
Short-selling is the sale of a security which the seller has not yet
purchased. In due course, the short-seller will have to buy the
borrowed security back from someone else in the market, in order to
return it to the lender. Short-sellers can borrow securities in the repo
or securities lending markets.
Wednesday
Sell 50MM (face) of newly-issued 1-month T-bills for delivery on Thursday at yield
1.75%
Next-day overnight repo: reverse out bills at 1.75% (determines price), repo rate of
1.90%
Thursday
Receive cash for T-bills
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4. Receive cash for T-bills
Hand over cash to RP counterparty, receive the bills
Deliver the bills to counterpart of short position
Arrange another next-day overnight repo at (assumed unchanged) Treasury yield of
1.75%, repo rate of 1.90%
Friday
Close out original RP transaction
Receive principal plus interest
Return T-bills
Perform under 2nd RP transaction
Lend 50MM
Receive T-bills as collateral
Pocket ____ from T-bill – RP spread
Arrange another next-day overnight repo at (assumed unchanged) Treasury yield of
1.75%, repo rate of 1.9%
Monday
Close out 2nd RP transaction
Receive principal plus 3 days interest
Return T-bills
Perform under 3rd RP transaction
Lend 50MM
Receive T-bills as collateral
Pocket ___ from T-bill – RP spread
Buy T-bills for next-day delivery at (assumed higher) yield of 2%
Tuesday
Close out 3rd RP transaction
Receive principal plus interest
Deliver T-bills
Perform under cash transaction
Pocket difference of ____as profit from short position in T-bills
Buy T-bills at 50MM
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