Is the Repo a Derivative?

Abstract

An explanation of a derivative instrument (forward, future, swap, option, etc) generally encompasses that the instrument is derived from, ie; is based on, certain, or aspects of certain, financial market instruments, and takes its value largely from these or other instruments or markets. Explanations also refer to the underlying instrument. No textbooks regard the repurchase agreement (repo) as a derivative instrument. This article argues that the repo is derived from an existing financial market instrument (the underlying instrument) and takes its value from another segment of the financial market. As such, it should be regarded as a derivative instrument.

In addition, the use of the word repo is often misrepresented, and the mathematics involved in repos is not readily available in the literature. This article endeavors to address these issues.