Effects of Queensland Floods in 2011

Part 1 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.

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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. Part 2 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 this resources boom is not only increasing the flow of overseas funds into Australian coffers, it is also creating further jobs and an increase in capital expenditure as more infrastructure is required to keep up with China’s insatiable demand. ” Jobs growth. Employment in Australia is on the rise with most people who are willing and able to work now having the opportunity to do so. Economists consider 5% unemployment which was the value in January recorded by the Australian Bureau of Statistics.

Greater number of jobs created because of factors such as the mining boom and the recovery effect in Queensland because of the floods will further lower the unemployment rate. This will have the effect of consumers having more disposable income thus requiring an increase in long term interest rates. Because of the above I have decided to adopt a strategy of buying contracts when rates are low and then selling after they rise in an attempt to make a gain. I will speculate. On Tuesday 22 march 2011 I enter into 5 June 2011 10 year bond futures contracts at $94. 200.

They have a semi year yield of 2. 9%. After closing out on Thursday 5 may at $95. 800 at yield of 2. 1% semi-annually I have made a gain of (101744. 85-100197. 18) $1547. 67 per bond and a total gain of $7738. 35 over the 5 contracts that were entered into. I made a gain because as the price went up the required yield went down therefore making a gain. For this contract I paid $1750 per contract and $8750 for all 5 bonds as per the text book. Trading in the SPI200 futures contract. The Australian market is set to fall because of factors both overseas and in Australia.

The worries in Europe about increasing debt as well as data about the global economy will offset any gains from the demand for Australia’s minerals and energy wants from china and other offshore economies. Overall I believe the Australian market will fall. I will use the strategy of selling while the market is high and will buy when the market is low. This will be a long position. On Thursday 28 April 2011 I entered into 6 June 2011 SPI futures contracts at $4587 and sold them at $4607. This gave me a gain of: (4587x25x6) = $114675 (outflow) (4607x25x6) = $115175 (inflow)

Gain = $500 x 6 = $3000 Trading in the SPI200 futures contract. Number of contracts to be sold: SPI200 price for 619 contracts: 70587239/ 4560×25 = 619. 19 or 619 contracts to be sold as part of hedge. 4560 x 25 x 619 = 70566000 (bought) 4602 x 25 x 619 = 71215950 (sold) Gain of =$649950 (gain) Actual sale of portfolio. Original value = 70587239 Sold for = 75987431 Gain of = $5400192 The effectiveness of the hedge is $6050142 (649950 + 5400192) gain Appendix A The following data is for 30 day cash rates for Part 1 of this assignment. It is from blackboard.

DatePrice of Feb-ruary 2011 30-Day Fu-tures Con-tract100-xNearest at or belowNearest at or above 18/11/201095. 2454. 7554. 755. 00 19/11/201095. 2454. 7554. 755. 00 22/11/201095. 244. 764. 755. 00 23/11/201095. 2454. 7554. 755. 00 24/11/201095. 2454. 7554. 755. 00 25/11/201095. 254. 754. 754. 75 26/11/201095. 2554. 7454. 504. 75 29/11/201095. 2554. 7454. 504. 75 30/11/201095. 2554. 7454. 504. 75 1/12/201095. 264. 744. 504. 75 2/12/201095. 264. 744. 504. 75 3/12/201095. 264. 744. 504. 75 6/12/201095. 264. 744. 504. 75 7/12/201095. 264. 744. 504. 75 8/12/201095. 264. 744. 504. 75 9/12/201095. 264. 744. 504. 5 10/12/201095. 264. 744. 504. 75 13/12/201095. 264. 744. 504. 75 14/12/201095. 264. 744. 504. 75 15/12/201095. 264. 744. 504. 75 16/12/201095. 264. 744. 504. 75 17/12/201095. 264. 744. 504. 75 20/12/201095. 264. 744. 504. 75 21/12/201095. 264. 744. 504. 75 22/12/201095. 264. 744. 504. 75 23/12/201095. 264. 744. 504. 75 24/12/201095. 264. 744. 504. 75 27/12/201095. 264. 744. 504. 75 28/12/201095. 264. 744. 504. 75 29/12/201095. 264. 744. 504. 75 30/12/201095. 264. 744. 504. 75 31/12/201095. 264. 744. 504. 75 3/01/201195. 264. 744. 504. 75 4/01/201195. 244. 764. 755. 00 5/01/201195. 2454. 7554. 755. 00 /01/201195. 2454. 7554. 755. 00 7/01/201195. 254. 754. 754. 75 10/01/201195. 254. 754. 754. 75 11/01/201195. 274. 734. 504. 75 12/01/201195. 2654. 7354. 504. 75 13/01/201195. 264. 744. 504. 75 14/01/201195. 264. 744. 504. 75 17/01/201195. 264. 744. 504. 75 18/01/201195. 264. 744. 504. 75 19/01/201195. 264. 744. 504. 75 20/01/201195. 264. 744. 504. 75 21/01/201195. 264. 744. 504. 75 24/01/201195. 2554. 7454. 504. 75 25/01/201195. 264. 744. 504. 75 26/01/201195. 264. 744. 504. 75 27/01/201195. 264. 744. 504. 75 28/01/201195. 264. 744. 504. 75 31/01/201195. 264. 744. 504. 75 1/02/201195. 264. 744. 504. 75

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