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Question:

Consider the following statements:
Statement 1: When the dealer is borrowing cash and providing collateral, it is known as a reverse repo.
Statement 2: The greater the credit risk in the collateral, the higher the repo rate.
Which of the following is most likely?

A Only Statement 1 is incorrect.
Explaination

Standard practice is to define the transaction based on the perspective of the dealer. If the dealer is borrowing cash and providing collateral, it is known as a repurchase agreement. If the dealer is lending cash and accepting collateral, it is known as a reverse repurchase agreement.
Statement 2 is indeed correct. Repo rates increase with the level of credit risk in the collateral.