Wednesday, September 06, 2006

Watchout Bumi repo market!

Suppose that Bumi Resources share price would drop after JSX lifted the trading suspension tomorrow. What will happen to Bumi repo market? There are probably trillions of rupiah worth of repo on Bumi shares in the hands of local investors.

By definition, the repo market is one in which two participants agree that one will sell securities to another and make a commitment to repurchase equivalent securities on a future specified date, or on call, at a specified price. In effect, it is a way of borrowing or lending stock for cash, with the stock serving as collateral.
"There are lots of local investors holding repo on Bumi shares. I think the worth could be trillions of rupiah," said one executive at local brokerage firm.
Risk in repo market arises mainly from volatility in the value of the collateral, in this case Bumi shares volatility.
The fall of Bumi shares would make repo holders not safe anymore and need more shares as collateral.




Anonymous Anonymous said...

Not to mention the impact on Bumi's death spiral debt and numerous share backed deals.

The vultures are circling.

September 07, 2006 12:45 PM  

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