Dollar roll
Hi there,
Let's talk about dollar roll like you're five.
Have you ever played with toys or games that you can borrow from a friend, but you have to give them back later? That's kinda what a dollar roll is.
Imagine if you had some money (let's say $100) and you wanted to invest it somewhere to make more money. But you don't want to keep the investment for a long time - you just want to do it for a short while (like a few weeks). But where can you invest your $100 for such a short time?
This is where a dollar roll comes in. It's like borrowing your $100 to a trusted friend who promises to return it back to you in a few weeks (with a little bit more money). In a dollar roll, a financial institution, like a bank or investment firm, borrows money from investors like you for a short period of time (say one month, or two) and uses that money to buy a security, like a bond (which is like a fancy loan).
Then, before the due date when they have to give you back your money, the financial institution sells that same security to a different investor (maybe another bank or investment firm) for a slightly higher price. That difference in price is the profit they make. So, at the end of the day, the financial institution has more money to give back to you than what you initially lent them - and that extra money is kinda like the interest you earn on your investment.
Just like with a playdate, the financial institution has to give your money back to you when they promised to (otherwise it would be unfair). And if they do, then everyone is happy because you made a little bit of extra money, and the financial institution got to use your money to make a profit.
I hope that helps you understand what a dollar roll is like. Any questions?
Let's talk about dollar roll like you're five.
Have you ever played with toys or games that you can borrow from a friend, but you have to give them back later? That's kinda what a dollar roll is.
Imagine if you had some money (let's say $100) and you wanted to invest it somewhere to make more money. But you don't want to keep the investment for a long time - you just want to do it for a short while (like a few weeks). But where can you invest your $100 for such a short time?
This is where a dollar roll comes in. It's like borrowing your $100 to a trusted friend who promises to return it back to you in a few weeks (with a little bit more money). In a dollar roll, a financial institution, like a bank or investment firm, borrows money from investors like you for a short period of time (say one month, or two) and uses that money to buy a security, like a bond (which is like a fancy loan).
Then, before the due date when they have to give you back your money, the financial institution sells that same security to a different investor (maybe another bank or investment firm) for a slightly higher price. That difference in price is the profit they make. So, at the end of the day, the financial institution has more money to give back to you than what you initially lent them - and that extra money is kinda like the interest you earn on your investment.
Just like with a playdate, the financial institution has to give your money back to you when they promised to (otherwise it would be unfair). And if they do, then everyone is happy because you made a little bit of extra money, and the financial institution got to use your money to make a profit.
I hope that helps you understand what a dollar roll is like. Any questions?