The paper "Why Does the Reserve Bank of Australia Largely Restrict Its Trading Transactions to Government" is an outstanding example of a micro and macroeconomic assignment. RBA’ s trading operations are restricted to government and semi-government securities. Such transactions have been attributed to a number of factors guaranteeing the transactions. Essentially, government and semi-government securities are mostly known as “ risk-free” investment (Council of Financial Regulators, 2011). It is in view that sovereigns cannot default on their payments; hence a guarantees payments (Boge, 2011). The government in question has the capability of printing currency.
Therefore in nominal terms, the government can inevitably fulfil its promise. Developed market security offers a higher propensity in facilitating the application of the market based or indirect instrument of market policy such as repo operations (Stevens, 2008). An increased recourse through the government’ s capability to adhere to the functioning requirements increases the illegible sets of collateral (Olivan, 2012). As a result, it enables RBA to conduct monetary policy through the available instruments. The expansion of the quantum of the collaterals enhances RBA’ s flexibility in sterilizing the capital flows (Australian Financial Markets Association, 2011). Reduced Risk (“ Risk-Free” ) Government securities offer a platform for a fixed income market, through risk-free benchmarking.
The bond market, for instance, is considerably lesser risks due to the following reasons; Bonds are typified by the promise from the issuer in presenting the face value of the security upon maturity Government bonds offer fixed rates of interest income supported by a promise from the issuer. The bond market’ s history precedes its reduced vulnerability to price swings for stock market volatility. Liquidity The Australian Treasury bond, on the other hand, offers great liquidity because it facilitates market participants to gain interest or hedge exposures in an efficient manner (Olivian, 2012).
Therefore, it offers support for the functionality of the Australian market through its provision of medium to long term risk-free interests rate (Flint, 2010).
AFMA (Australian Financial Markets Association). (2011). 2011 Australian Financial Markets Report. Retrieved fromhttp://www.afma.com.au/afmawr/_assets/main/lib90013/2011%20afmr.pdf
Boge, M., & Wilson, I. (2011). The Domestic Market for Short-term Debt Securities. RBA
Bulletin, September, pp 39–48.
Blanchard, O., & Sheen, J. (2013). Macroeconomics; Australasian Edition. Boston, Pearson
Higher Education AU.
CFR (Council of Financial Regulators). 2011. Central Clearing of OTC Derivatives in Australia. Retrieved from http://www.rba.gov.au/publications/consultations/201106-otc-derivatives/pdf/201106-otcderivatives.pdf
Finlay, R., & Olivan, D. (2012). Extracting Information from Financial Market Instruments. RBA
Bulletin, March, pp 45–54.
Hubbard, G., Garnett, A., Lewis, P. (2012). Essential of Microeconomics. Boston, Pearson
Higher Education AU
Lepone, A., &Flint, A. (2010). The Impact of an Increase in Minimum Tick in the ASX 3 Year Commonwealth Treasury Bond Futures Contract’, Market Insights, Edition 31.
Retrieved from http://www.sfe.com.au/content/sfe/trading/market_insights_issue_31_201002_february_2010.pdf
Lien, B., & Andrew Zurawski, A. (2012). Liquidity in the Australian Treasury Bond Futures
Market retrieved from http://www.rba.gov.au/publications/bulletin/2012/jun/6.html
Olivan, D. (2012). Extracting Information from Financial Market Instruments. RBA Bulletin,
March, pp 45–54.
Stevens, G. (2008). Liquidity and the Lender of Last Resort. RBA Bulletin, May, pp 83–91.