Special Purchase and Resale Agreements Quizlet: A Comprehensive Overview
Special Purchase and Resale Agreements (SPRAs) are a common financial instrument used in the field of investment banking. They are an agreement between two parties who are willing to enter into an agreement to buy and sell a specific financial asset at a set price for a certain time period in the future. SPRAs are also referred to as “forward contracts” that involve the purchase or sale of securities such as stocks, bonds, or currency pairs.
If you`re a newcomer to the world of SPRAs, it`s essential to understand the basics. Here`s a comprehensive walkthrough of SPRAs and how they work.
What is a Special Purchase and Resale Agreement (SPRA)?
An SPRA is a binding contract between two parties where one party agrees to buy a specific financial asset from the other party on a specific date in the future. The buyer and seller agree on the purchase price at the current date and the future date when the purchase will occur.
How do SPRAs work?
In a typical SPRA, the seller agrees to sell a financial asset to the buyer at a specific price, with the delivery date and the amount of the financial asset agreed upon beforehand. The buyer, on the other hand, agrees to purchase the asset at the price agreed upon and on the delivery date.
SPRAs are commonly used in cases where the buyer or seller wants to fix the future price of the asset in question. This type of financial instrument is used by investors who expect the price of the financial asset to increase in the future. By agreeing to purchase the asset at a fixed price in the future, the buyer can protect themselves against the risk of the price going up.
Benefits of SPRAs
For investors, SPRAs offer several benefits that make them a useful financial instrument. Firstly, they can help to hedge against the risk of a sudden change in the price of the underlying asset. Secondly, they offer a way to lock in the price of an asset and hence lower the risk associated with fluctuations in the market price. Lastly, SPRAs can also be used to speculate on the future price of an asset.
Risks Associated with SPRAs
While SPRAs can be an effective hedging tool, there are also some risks involved with using them. One of the biggest risks associated with SPRAs is counterparty risk. This risk arises when a seller fails to deliver the financial asset on the agreed date, or when the buyer fails to pay the agreed-upon price. It is essential to conduct extensive due diligence on the counterparty before entering into an SPRA agreement.
Conclusion
In conclusion, SPRAs are an essential financial instrument used by investors to hedge against price fluctuations, speculate on the future price of an asset, and lock in a price. While they offer a variety of benefits, there are also risks associated with SPRAs that investors must keep in mind. As with any investment decision, it is essential to conduct extensive research and seek professional advice before entering into an SPRA agreement.
