market to run a "matched book." A dealer runs a matched book by simultaneously enter- ing into a repo and a reverse repo for the same collateral with the same maturity. The dealer does so to capture the spread at which it enters into a repurchase agreement (i.e., an agreement to borrow funds) and a reverse repurchase agreement (i.e., an agreement to lend funds). For example, suppose that a dealer enters into a term repo for one month with a money market mutual fund and a reverse repo with a cor- porate credit union for one month for which the collateral is identical. In this arrangement, the dealer is borrowing funds from the money market mutual fund and lending funds to the corporate credit union. From Panel A in Exhibit 8.3, we find that the repo rate for a one-month repurchase agreement is 1.90% and repo rate for a one-month reverse repurchase agreement is 1.97%. If these two positions are established simultaneously, then the dealer is borrowing at 1.90% and lending at 1.97% thereby locking in a spread of 7 basis points. However, in practice, traders deliberately mismatch their books to take advantage of their expectations about the shape and level of the short-dated yield curve. The term matched book is therefore something of a misnomer in that most matched books are deliberately mismatched for this reason. Trad- ers engage in positions to take advantage of (1) short-term interest rate movements and (2) anticipated demand and supply in the underlying bond. The delivery requirement for collateral also affects the level of the repo rate. If delivery of the collateral to the lender is required, the repo rate will be lower. Conversely, if the collateral can be deposited with the bank of the borrower, a higher repo rate will be paid. For example, on November 15, 2001, Bloomberg reports that the general collateral rate (repos backed by non-specific collateral) is 2.10% if delivery of the collateral is required. For a triparty repo discussed earlier, the general collateral rate is 2.13%. The more difficult it is to obtain the collateral, the lower the repo rate. To understand why this is so, remember that the borrower (or equiv- alently the seller of the collateral) has a security that lenders of cash want for whatever reason.7Such collateral is said to "on special." Collateral that does not share this characteristic is referred to as "general collat- eral." The party that needs collateral that is "on special" will be willing to lend funds at a lower repo rate in order to obtain the collateral. For example, on November 14, 2001, Bloomberg reports the on-the-run 5- year Treasury note (3.5% coupon maturing November 15, 2006) was "on special" such that the overnight repo rate was 0.65%. At the time, the general collateral rate was 2.13%. There are several factors contributing to the demand for special col- lateral. They include:   ■ government bond auctions-the bond to be issued is shorted by dealers in anticipation of new supply and due to client demand;