Why is there credit risk in a repo transaction?

Question:

Why is there credit risk in a repo transaction?

Repo Transaction:

Repo transaction is the repurchase of a short agreement. It is the rate by which commercial banks borrow debt from the central bank. It is used to maintain liquidity, avoid shortage of funds in the economy, and to keep control on inflation.

Answer and Explanation:

Credit risk is involved in each financial transaction and it is related to repayment of the debt. The outstanding amount of debt includes the...

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Transaction Processing Systems: Application & Examples

from UExcel Business Information Systems: Study Guide & Test Prep

Chapter 12 / Lesson 2
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