C1T2L2 · Revised 2026-10-26

Decision and objectives

Practical task: Trace a secured seven-day cash placement

Objectives: Identify repo borrower and reverse-repo cash lender; Calculate opening and closing cash; Stress collateral recovery against the owed amount.

Required prior knowledge: C1T2L1. Classification: domestic. Revision: 2026-10-26. All fictional names, prices, rates, fees, calendars and tax schedules below are hypothetical unless explicitly identified as a dated document observation.

A security in a transaction does not automatically mean the investor bought a bond for its coupons. A repo pairs an opening transfer with an agreed reversal. Name the perspective: the cash borrower sells with a commitment to repurchase; the cash lender conducts the reverse repo. This lesson follows cash and collateral separately so that a quoted repo rate cannot be mistaken for a security's yield.

Mechanics

At opening, the cash lender pays cash and receives the contractual collateral/security interest under the relevant arrangement. At closing, the borrower pays the agreed repurchase amount and the lender returns the securities. Exact legal title, substitution, income treatment and default rights belong to the agreement and market framework. In Borsa Istanbul's organized repo market, the published description identifies blocked custody and revaluation arrangements. A retail customer's bank transaction may not replicate every exchange-member detail.

Collateral protects against a counterparty's failure to pay by providing another recovery source. Its usefulness depends on valuation, custody, enforceability, liquidation time and sale costs. Do not count both full borrower repayment and full collateral sale as independent expected proceeds.

Price and return drivers

For a fixed simple-rate teaching case, closing cash = opening cash × (1 + rate × days / basis). A haircut can be defined as (collateral value − cash lent) / collateral value; state that denominator because “margin percentage” can mean something else. Recovery gap = amount owed − net collateral-sale proceeds, floored at zero for an uncovered-loss estimate. Daily collateral adjustment can reduce, but cannot eliminate, a sudden price gap or operational delay.

Worked case

Hypothetical TRY reverse repo: investor lends TRY 100,000 for seven actual days at 31.025% simple annual rate, Actual/365. Interest = 100,000 × 0.31025 × 7 / 365 = TRY 595; closing cash owed is TRY 100,595. Opening collateral market value is TRY 105,000, implying a haircut of 5,000 / 105,000 = 4.7619% under this definition. A hypothetical TRY 25 transaction fee and invented 10% tax on interest, TRY 59.50, leave TRY 100,510.50 if the borrower pays in full.

A collateral ledger would show TRY 105,000 of identified securities supporting the claim, not a second TRY 105,000 investment profit. The investor's contractual return in this example is the repo interest, before costs.

Adverse case

Suppose the borrower defaults at closing and collateral can be sold only for TRY 96,000, with TRY 500 liquidation cost. Net collateral proceeds are TRY 95,500; uncovered amount versus TRY 100,595 owed is TRY 5,095. That is a simplified recovery gap, before any later unsecured recovery and excluding ordinary fee/tax assumptions because default tax treatment is not supplied. It is incorrect to say “collateral was 105% of cash, so no loss is possible.” A large overnight gap can occur before replenishment.

Practical use

For domestic access, ask the authorized intermediary which market or bilateral agreement supports the placement, whose name holds the securities, what is blocked and what happens at maturity. Confirm the actual value dates and day basis. Account fees, spread embedded in the quoted rate, withholding and transfer charges determine the cash investor receives. Read collateral eligibility, mark frequency, substitution rights and default procedure. No actual current minimum transaction size or tax rate is taught here; both must be checked on the execution date.

Decision boundaries

Reverse repo can fit a known short cash horizon when its maturity, counterparty and recovery arrangements meet the investor's constraints. It fails as a liquid overnight substitute if the transaction cannot be unwound when funds are needed. Decline when the collateral cannot be identified or its custody and default rights are unclear. Holding a highly rated security as collateral does not turn a claim against a weak counterparty into instantly accessible cash.

Practice and references

Exercise: hypothetical cash lent TRY 80,000, five days, 29.2% simple annual rate, Actual/365, fee TRY 20 and invented 10% tax on interest. Answer: interest = TRY 320; tax = TRY 32; normal net receipt = TRY 80,268. If default recovery is TRY 77,000 less TRY 300 sale costs, net collateral cash is TRY 76,700 and shortfall versus TRY 80,320 owed is TRY 3,620. Show borrower payment and collateral recovery as alternative paths.

Takeaway: collateral is a recovery mechanism; it is not a promise of zero loss.

Reference guide: repo; simple-interest; collateral-coverage; repo; reverse-repo; haircut. Next: C1T2L3. Topic test.

Sources: Borsa Istanbul Repo product description — Repo and reverse repo definitions; date not stated; retrieved 2026-10-26; checked 2026-10-26; Borsa Istanbul Repo–Reverse Repo Market — Opening description: blocked custody, daily revaluation, collateral and maturity settlement; date not stated; retrieved 2026-10-26; checked 2026-10-26; GIB Investment Income Tax Guide, publication 584 — Introduction; income classification; income excluded from declaration; withholding and declaration sections; date 2026-02; checked 2026-10-26. Source records: sources.json. Check the cited rule dates and confirm current dealing terms before any transaction.

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