Effects of Queensland Floods in 2011

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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. 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
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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
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