Repo with short call option

Business objective

The client has a large equity exposure in his own company.  He wants to release financing with a high Loan-To-Value using a large portion of his shares at a funding level below the repo level.


The clients sells lets say US $100m of shares to a participating bank at a 30{e68217344b855fcd608ed2c4c41f83644da7cd41ea524fbfa2ad06c632d3255d} discount to its market price and agrees to repurchase them at the same price at maturity.

The client also sells to the bank OTC call options with a 140{e68217344b855fcd608ed2c4c41f83644da7cd41ea524fbfa2ad06c632d3255d} strike on these shares to lower the financing cost by lets say 25bps.

The client pays periodic interest (Libor + Spread) on the sale price (effectively the “loan” of $70m) during the 6 month life of the Repo and is required to arrange more collateral if the share price falls at a or below a pre-defined trigger level.  This is known as a “top-up”.

The Repo can also be terminated early if the collateral falls at or below a pre-defined termination level.  Financing with a Repo can be rolled over at maturity by mutual agreement.