CORRA

Definition

CORRA, or the Canadian Overnight Repo Rate Average, is a benchmark interest rate that reflects the cost of borrowing Canadian dollars overnight using repurchase agreements. It is a critical indicator for monetary policy and is used as a reference rate for various financial products, including loans and derivatives, helping to ensure liquidity and stability in the Canadian financial market.

5 Must Know Facts For Your Next Test

1. CORRA is calculated based on actual transactions in the overnight repo market and is published daily by the Bank of Canada.
2. It serves as a key benchmark for financial institutions in Canada when pricing their loans and financial products, ensuring consistency and transparency.
3. The use of CORRA has been increasing since it was established in 2018, particularly after the decline of LIBOR as a reliable benchmark.
4. CORRA is considered a risk-free rate since it is backed by high-quality collateral (government securities), making it a safer alternative for borrowers.
5. The Bank of Canada uses CORRA as part of its monetary policy framework to guide interest rates and influence overall economic activity.

Review Questions

• How does CORRA influence the pricing of financial products in Canada?
  • CORRA influences the pricing of financial products by serving as a key benchmark interest rate. Financial institutions use CORRA as a reference point when determining interest rates for loans and mortgages. Since it reflects the actual cost of borrowing overnight using repurchase agreements, it ensures that the pricing aligns with market conditions and reflects the current liquidity situation in the financial system.
• Discuss the advantages of using CORRA over traditional benchmark rates like LIBOR.
  • The advantages of using CORRA over LIBOR include its basis on actual transactions rather than estimated rates, which enhances its reliability. CORRA reflects real market conditions in Canada’s overnight repo market, making it more relevant for domestic borrowers. Additionally, being considered a risk-free rate due to its backing by high-quality collateral further establishes trust in its use for pricing financial products.
• Evaluate the impact of CORRA's establishment on the Canadian financial market, particularly in relation to monetary policy and economic stability.
  • The establishment of CORRA has significantly impacted the Canadian financial market by providing a transparent and reliable benchmark for overnight borrowing. This has improved the efficiency of monetary policy transmission by aligning lending rates with central bank goals. As CORRA gains acceptance, it reduces reliance on less stable benchmarks like LIBOR, contributing to greater economic stability by ensuring that interest rates reflect true market conditions and supporting sound financial practices among institutions.

Related terms

Repurchase Agreement (Repo): A financial transaction where one party sells securities to another with an agreement to repurchase them at a specified future date and price, typically used to manage short-term funding needs.

Benchmark Rate: An interest rate that serves as a standard for comparing other rates, often used as a reference for pricing loans, mortgages, and other financial products.

Bank of Canada: The central bank of Canada responsible for formulating monetary policy, managing inflation, and issuing currency, which also plays a key role in determining key interest rates like CORRA.