Wednesday, July 22, 2009

types of open-market operations

whatever the aim of open market operations, the fed uses two basic types of open market transaction:
1. Outright purchases or sales.
2. Purchases under repurchase agreements (RPs) and sales under matched sales-purchase agreements (reverse RPs,also Known as matched transaction)
Outright Purchases or sales
Outright purchases or sales are what you might expect,the fed buys or sells securities in the open market with no strings attached to the transaction. if the fed purchases a security, it is not obligated to sell it back at a later date. if the Fed sells a security to a buyer, the buyer is not obligated to resell it to the fed at a later date.
Repurchase agreements and Reserve Repurchase Agreements
In a repurchase agreement the Fed buys securities from a dealer and dealer agrees to repurchases the securities at a specified date and price. In effect, such a transaction is a loan by the Fed to the dealer; the interest rate is set bu auction among the dealers.A fed purchase under a repurchase agreement by the dealer is referred to as an RP transaction.
The counterpart to the RP is the reserve RP, or matched sales-purchase transaction. In such transaction, the fed sells securities to a dealer and also agrees to buy back the securities at a specified price and date. this amounts to a loan to the fed by the dealer.
RPs and reverse RPs are typically very short-term contracts. the fed usually conducts RPs for fewer than 15 days (usually 7 days), and it typically terminates reverse RPs in 7 days or less.Originally, large commercial banks and government securities dealers primarily used RPs as an alternative means of financing their government securities inventories. Now, however, a variety of institutional investors regularly use RPs, and the federal reserve bank of New York uses RP transactions to implement monetary policy directives and to make investments for foreign officials and monetary authorities.
the duration of RPs and reserve RPS indicate that they are used when the Fed wants to alter depository institutions reserves temporarily.

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