# Repo convexity

## TL;DR

This paper explains the repo discounting basis as a convexity effect caused by the decorrelation of discount rates for derivatives and bonds, providing models for interpolation and extrapolation of repo rates.

## Contribution

It introduces a Hull-White model to quantify the repo basis as a convexity effect and offers practical formulas for repo rate interpolation and extrapolation.

## Key findings

- Repo basis explained as a convexity effect
- Derived expressions for repo rate interpolation
- Provided methods for repo curve extrapolation

## Abstract

There is an observed basis between repo discounting, implied from market repo rates, and bond discounting, stripped from the market prices of the underlying bonds. Here, this basis is explained as a convexity effect arising from the decorrelation between the discount rates for derivatives and bonds. Using a Hull-White model for the discount basis, expressions are derived that can be used to interpolate the repo rates of bonds with different maturities and to extrapolate the repo curve for discounting bond-collateralised derivatives.