Repo mechanics: repo rate, initial margin, haircut and variation margin

In short

• Repurchase agreement (repo): sell a security now and agree to buy it back on the repurchase date at the repurchase price. The security seller is the cash borrower; the security buyer is the cash lender.
• Repurchase price = purchase price × $(1 + \text{repo rate} \times \frac{Days}{Year})$: simple interest, usually on a 360-day year.
• The seller keeps the economic ownership: it still receives the coupons paid during the repo; the lender earns the repo rate.
• Initial margin = security price ÷ purchase price (above 100% means over-collateralized). Haircut = (security price − purchase price) ÷ security price.
• Variation margin = initial margin × purchase price at t − security price at t. Positive → borrower posts more collateral; negative → borrower can ask for collateral back.