Xiaoyanzi

8Dealing Simulation Report

Dealing Simulation Report

Dealing Simulation Report

Australian Common Wealth Government Securities Yield Curve

Formula for calculating yield

Yield = [{(Face value –market price)/ face value} x 360/maturity] x100

The calculated yields are as presented in the table below

Maturity

Face Value

Market value

550, 000, 000

549, 052, 321

250, 000, 0000

249, 078, 750

350, 000, 000

348, 000, 665

250, 000, 000

248, 067, 115

200, 000, 000

198, 038, 604

350, 000, 000

345, 838, 567

The yield values are then plotted against the days to maturity to have the yield curve.

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The figure of the yield curve shows an upward slope and inclines slightly as the curve moves towards the right. From the shape, the yield curve is said to be a normal yield curve. This shape indicates that the short-term Australian commonwealth bills have a lower yield as compared to the long-term bills.

The normal yield curve is a signal to the fixed-interest fund managers that National Reserve is going to be raising interests in the future. Characteristically, the national reserve only raises the interest rates in case of economic
expansion, and the regulator is worried about probable inflation. The yield curve of the Australian securities is likely to precede an economic upturn. The Australian interest rates in six months are likely to go be high considering the slope of the curve, but there will be no much difference when it gets to the twelfth month because the slope of the curve reduces as the time increases.

Trading Portfolios

  1. Portfolio Composition

At the commencement of trading

At the start of the trade, the face values of the bank bills were $550, 000, 000 for bills with 30 days maturity, $250, 000, 000 for 60 days maturity, $350, 000, 000 for 90 days, $250, 000, 000, for 120 days $200, 000, for $150, 000, 000 days and $350, 000, 000 for 180 days maturity. The market values at commencement were $549, 052, 321, for 30 days maturity, $249, 078, 750, for 60b days, $348, 000, 665, for 90 days, $248, 067, 115, for 120 days, $198, 038, 604, for 150 days and $345, 838, 567 for 180 days maturity.

After Dealing Session 2

The face values were $430, 000, 000 for 30 days maturity, $120, 000, 000 for 60 days maturity, $260, 000, 000 for 90 days, $230, 000, 000 for 120 days, $180, 000, 000 for 150 days and $330, 000, 000 for 180 days maturity. The market values at this point were for 30 days maturity the value was $429, 266, 131, $119, 563, 674 for 60 days, $258, 546, 473 for 90 days, $228, 251, 531 for 120 days, $178, 256, 505 for 150 days and $326, 076, 363 for 180 days maturity.

  1. Level of Interest Risk measured by Portfolio Modified Duration and Convexity

From the portfolio summary, the modified duration of the portfolio is 2.1.

  1. At commencement

Market value

549, 052, 321

249, 078, 750

348, 000, 665

248, 067, 115

198, 038, 604

345, 838, 567

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  1. After dealing session 2

Market value

429, 266, 131

119, 563, 674

258, 546, 473

228, 251, 531

178, 256, 505

326, 076, 363

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The modified duration and price/yield curves show that as we move away from the 2.1% (portfolio modified period) the difference between the actual prices change and the modified duration gets bigger because of the curvature of the price/yield curve. The high levels of modified duration indicate that the bills are sensitive to changes in interest rates. The modified duration also indicates that for given yields to maturity, the bills with a longer term to maturity are more sensitive to the changes in interest rates than those with shorter durations to maturity. The modified durations are to indicate how responsive the bill prices are to small changes in yield to maturity.

The risk of the portfolio increased slightly, but the objective of increasing the risk in the portfolio by investing in medium to long-term bonds was not achieved. The important tips that could turn tables on performance are to have a planned strategy beforehand and develop a course of action for what is intended (Eronesi, 2016 pp. 199-203). Another important tip is to back test the trading strategies, the strategies to be used are first simulated against some existing data preferably historical data to see if the strategies can help gain any important insight or trading indications from the various outcomes.

Performance from one session to the next improves because one learns a different tip as the session’s changes. Some of the important lessons from the two sessions are the importance of making a decision on what tactical effort to focus on. One must make a prompt decision whether to focus on risk-free rates, expectations on inflation or credit premiums (Eronesi, 2016 pp. 199-203). With the risk-free rates, the variations are mainly after quite a bit of time, but the changes are difficult to forecast. Another important lesson is that market timing that change in inflationary expectations poses many challenges. Projections made based on expected changes in real interest rates, and inflation is modest in nature that leaves small rewards even if the projections are right.

Bibliography

Eronesi, P. (2016). Handbook of fixed-income securities