Final answer:
A repurchase agreement (repo) is a short-term financial lending agreement where one party sells securities as collateral to another party with the promise to repurchase them at a higher price at a later date.
Step-by-step explanation:
A repurchase agreement (repo) is a form of short-term borrowing primarily used in the money markets. It is a financial agreement where one party sells securities to another party with the promise of buying them back at a later date, usually with an added interest.
The securities being sold act as collateral for the loan. Repurchase agreements are essentially short-term loans with the securities as the backing asset. For example, if a firm needs quick financing, it may enter into a repurchase agreement with a lender, selling it some of its securities under the agreement that it will repurchase them at a specific price on a specified date.
This transaction helps the firm to acquire the funds it needs while providing the lender with some security in the form of collateral.