The effect in the probability of an increase in the overnight cash rate will decrease in the aftermath of the Queensland floods. Because of the decrease in the probability of a .25% increase (decrease), it is likely the cash rate will not change in the month of January or on February 1st. This is in part because of the effects of the Queensland floods will have had on the national and local economy. Effects of the floods can also be observed in the form of low inflation and lack of economic growth, but these are considered to be “temporary adverse effects” so it is likely that rates will increase in the near future but not in this period (Jan-Feb 2011) of time.
On the 1st of February 2011 the Reserve Bank Of Australia during it's scheduled meeting decided not to increase(decrease) the overnight cash rates from 4.75% to 5.00% (or 4.50%) and instead chose to keep the rates at 4.75%. This was mostly due to recent flooding in Queensland. The floods resulted in damage or destruction to physical capital where flooding occurred. Because of all this the economic growth has not and will not grow as much as it would otherwise have done if the floods never occurred. The amount of growth affected because of recent events will depend on the extent of the damage the event caused as well as how long it will take to rebuild all infrastructures. Because of this lost economic growth the RBA chose to keep the overnight cash rates at 4.75%.
This can also be seen by observing the data (see appendix A). As can be seen the data is very close to matching 4.75% and is very far away from 4.50% and 5.00%. This observation alone is a good indication of what could possibly happen.
Trading In The 90 Day Bank Accepted Bill Contract.
Based on research I conducted I believe the short term interest rate will fall over the coming months. This prediction is based on several factors that would potentially cause a fall in interest rates. These factors include the Queensland floods earlier this year, the mining boom, achieving full employment and jobs growth.
The Queensland floods although having a negative effect on the local economy may be beneficial as it may increase employment. Although the boom of mining and full employment is a positive these are longer term considerations and the recent flooding disaster will be of more importance in the short term. Also the RBA states that “The focus of monetary policy will remain on medium-term prospects for economic activity and inflation.” My interpretation of this statement and my general research is that I believe a fall in short term interest may occur because of the required surge in employment to aid with the recovery process because of natural disaster.
I will take the strategy of using a long position of buying when prices are low and selling when high. I think the prices may increase because of increased demand in certain areas because of the rebuilding after the Queensland floods and a fall of the interest rate will increase demand as people will try and take advantage of the lower interest rates.
On April 5 I purchased 4 June 2011 90 day bank bill contracts at 95.225 which taken away from 100 gives a yield of 4.775%.
On May 9 I close out at a price of 95.255 with a yield of 4.745%.
With a face value of $1000000 on maturity the value of each contract at April 5 is $988363.04 and the May 9 contract is valued at $988423.26.
After reviewing the performance of this transaction I determine we have made a gain of $60.22 per contract and a total gain of $240.88. I made a gain because as the price went up the required yield went down therefore making a gain.
For this transaction I paid a deposit of $750 per contract and $3000 for all contracts as shown in the text book .
Trading in the 10 Year Treasury bond Futures Market
The mining boom will give massive economic gain for Australia over the next few decades. According to economist Rolf Schaefer “Of course...
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