Question 1 (7.5 marks)

You are a financial analyst working for the Commonwealth Treasury. You have been asked to provide an explanation for the current yield curve using the three theories, pure expectations theory  liquidity premium theory and segmented markets theory. Obviously to fully explain the theories you will need to include in your brief any assumptions of the theories and any calculations regarding forward rates that aid in the explanation of the curve under a particular theory

1 year yield 6%

2 year yield 5%

3 year yield 4.75%

 Question 2 (7.5 marks)

Your are a foreign exchange analyst at Thomas Cook. A report has recently been released indicating that World commodity prices are set to fall over the next 12 months and interest rates in the US are forecast to be lower than in Australia for the coming year.  Outline the impact of this information on the likely value of the AUD relative to the USD over the coming year. Treat the events separately but in conclusion provide an overall impact on the direction of the AUD.  Use calculations and graphical analysis to support your argument where appropriate.  Assume that the current AUD/USD rate is 0.9350 and that interest rates are 1.00% in the US and 2.75% in Australia.

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