• The repo market is important for liquidity reasons. As a result it allows banks to increase their profitability.
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• 1. Explain what repos are and draw the cashflows with all the details.
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• 2. Answer the following sub questions and, based on that, explain the relationship between having access to the repo market and the bank’s profitability.
• i. How does the regulator mitigate the risk relevant for this question?
• ii. How does having access to the repo market permit to structurally increase the banks profitability.