Ef3333 Assignment One

[pic]

Department of Economics and Finance

EF3333 Financial Systems, Markets and Instruments

Individual Assignment Hand-in Cover Sheet and Declaration

|Student ID |52166612 |

|Name |Lam Chun Wing Andrew |

|Year |2 |

|Major |Quantitative Finance and Risk Management |

|Lecturer |Name: FANG Zhen Min Session No. C04 |

| |

Q1. How can a change in interest rate affect the profitability of financial institutions?

Interest rate is the rate to judge how much interest needs to pay for the use of funds from borrower to lender; which is usually expressed as a percentage of the funds. For financial institutions, the rate will affect both sides on their cost of borrowing and the revenue of lending, so that affect their profitability such as interest spread.

As a lender, decline in interest rate may decrease the income on their financial assets such as loans. For example, banks may create commercial or mortgage loans for business companies and individuals to earn the interest, they usually use variable interest rate i.e. best lending rate plus margin as a standard.

As a borrower, decline in interest rate in opposite will lower the cost of acquiring funds. Financial institutions not only borrow money from individual customers according to the rate of depository, but also other financial institutions and banks according to the HIBOR (Hong Kong Interbank Offering Rate).

In addition, financial institutions may hold and...