Repo rate and collateral

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From exam 2, book 2, p.m session question number 13.5
“The Repo strategies interest cost could be reduced by using hot collateral such as on-the-run U.S. Treasuries”
According to Schweser this statement is true.
Cirriculum states that certain lenders will lower the repo rate if availability of collateral is limited. When they say “hot collateral”, it sounds like the collateral would be in high demand. On-The-Run U.S treasures are one of the most liquid fixed income instruments out there, how by any means would these be considered limited availability?
 
This is where the CFA disconnects with the real world. If they say Greek bonds are hot collateral, you best believe your repo rate will be lower.
 
It’s for delivery on synthetics. On the run always extremely high demand in repo market for delivery on derivatives daily mark to market.
 
hot collateral such as on-the-run U.S. Treasuries
less available risk free high liquidity
certain low cost
 
Collateral that is “limited” can still be in high demand and very liquid.
 
bpdulog Wrote:
——————————————————-
> This is where the CFA disconnects with the real
> world. If they say Greek bonds are hot collateral,
> you best believe your repo rate will be lower.
On a side note, is this something that you are seeing the market. given the issues in Greece I doubt many investors consider Greek bonds as “hot collateral”
 
BTON04 Wrote:
——————————————————-
> bpdulog Wrote:
> ————————————————–
> —–
> > This is where the CFA disconnects with the real
> > world. If they say Greek bonds are hot
> collateral,
> > you best believe your repo rate will be lower.
>
> On a side note, is this something that you are
> seeing the market. given the issues in Greece I
> doubt many investors consider Greek bonds as “hot
> collateral”
No, I just used that as an extreme example of what could be possibly thrown at you.
 
BTON04 Wrote:
——————————————————-
> bpdulog Wrote:
> ————————————————–
> —–
> > This is where the CFA disconnects with the real
> > world. If they say Greek bonds are hot
> collateral,
> > you best believe your repo rate will be lower.
>
> On a side note, is this something that you are
> seeing the market. given the issues in Greece I
> doubt many investors consider Greek bonds as “hot
> collateral”
If CFAI tells you Greek bonds are “hot collaterals” in the exams, please don’t waste time arguing with them…
And if they tell you there is a country called Kap that uses a currency called Kip, don’t argue that there is no such country or currency. The grader might be forced into giving you negative scores…
 
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