What are the two types of repurchase agreements?

Repurchase agreements, commonly referred to as repos, are financial transactions wherein one party sells securities to another with an agreement to repurchase them at a later date for a predetermined price. The two primary types of repurchase agreements are categorized based on how the transaction is financed, leading to the classifications of cash driven and security driven.

In a cash-driven repurchase agreement, the buyer of the securities provides cash to the seller, who uses that cash to secure short-term financing. This type of repo is often used by institutional investors who need liquidity and are looking for a way to earn a return on their cash reserves while also ensuring the safety of that capital.

On the other hand, a security-driven repurchase agreement involves using the securities themselves as collateral for a loan. In this case, the seller retains ownership of the securities while effectively receiving financing against them. This structure is also beneficial as it can help minimize the cash outflow and allows the seller to maintain exposure to the potential market appreciation of the securities.

The other classifications mentioned in the incorrect options do not accurately reflect the commonly accepted categorization of repurchase agreements in the financial literature. Therefore, identifying the correct types as cash driven and security driven is crucial for understanding how these transactions function within financial markets.