Q2. (Repo and Financial Statements) Repo is a contract where a buyer buys an asset at X and sell it back to its seller at Y (Y>X) one day after. Therefore, this buy and sell it back at higher price is just like lending with a collateral (the asset being exchanged). Suppose that there is a bank that holds huge amount of risky bonds in its portfolio. Tomorrow, the bank has to report its financial statements to the public but the amount of risky bonds the bank currently holds is against the regulation on bank risk management. What the CEO of the bank chose to do is to initiate a large-scale repo contract and sell the risky bonds overnight and remove it from its balance sheet. When the reporting process is done, the bank will buy back those bonds. Do you think this is ethical? Based on this case, do you think when a firm engages in repo, we have to consider it as independent selling and buying back or lending with collateral? (The former means adjustments in total assets, the latter does not mean changes in total assets in general).
Q2. (Repo and Financial Statements) Repo is a contract where a buyer buys an asset at X and sell it back to its seller at Y (Y>X) one day after. Therefore, this buy and sell it back at higher price is just like lending with a collateral (the asset being exchanged). Suppose that there is a bank that holds huge amount of risky bonds in its portfolio. Tomorrow, the bank has to report its financial statements to the public but the amount of risky bonds the bank currently holds is against the regulation on bank risk management. What the CEO of the bank chose to do is to initiate a large-scale repo contract and sell the risky bonds overnight and remove it from its balance sheet. When the reporting process is done, the bank will buy back those bonds. Do you think this is ethical? Based on this case, do you think when a firm engages in repo, we have to consider it as independent selling and buying back or lending with collateral? (The former means adjustments in total assets, the latter does not mean changes in total assets in general).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Q2. (Repo and Financial Statements) Repo is a contract where a buyer buys an asset at X and sell it back
to its seller at Y (Y>X) one day after. Therefore, this buy and sell it back at higher price is just like lending
with a collateral (the asset being exchanged). Suppose that there is a bank that holds huge amount of risky
bonds in its portfolio. Tomorrow, the bank has to report its financial statements to the public but the amount
of risky bonds the bank currently holds is against the regulation on bank risk management. What the CEO
of the bank chose to do is to initiate a large-scale repo contract and sell the risky bonds overnight and
remove it from its balance sheet. When the reporting process is done, the bank will buy back those bonds.
Do you think this is ethical? Based on this case, do you think when a firm engages in repo, we have to
consider it as independent selling and buying back or lending with collateral? (The former means
adjustments in total assets, the latter does not mean changes in total assets in general).
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