Profit and Risk Taking

1) Examine the relationship between profits and risk-taking of financial institutions. Assess the suitability of the reforms that have been suggested to make developed countries financial systems more resilient to future economic shocks.

I) Relationship between profits and risk taking of the financial institutions:

The financial institutions can increase their profits by different method. The first method it’s to lending money. A financial institution can lend money to an institution less solvent than an other one. In this type of operations the financial institutions that lend money to an other takes more risks to lend at an institution more solvent. It’s the case of the Greece who borrows money more expensive than Germany. In this case the profit will be superior because the risk is higher.

The second method always in relation with the credit is that the institutions can make more credits at the other institutions more solvent. In this case the risks is less but the profit could be better if the number of credit is bigger.

The third method to increase the profit of the financial institutions is that the institution can takes market risks. With market risks I want to talk about the trading with leverage. The leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.

The brokers can propose to their customers the opportunity to trade on borrowed capital, so that traders do not have to invest tens of thousands of dollars for the chance to make real profits. When you trade with a leverage of 1:100 or multiply by 100 means that for every $ 1 you invest in the market, the broker invests $ 100. Therefore, you can control the amount of $ 10,000 by investing $ 100. Most Brokers offers traders the ability to use leverage up to 1:400, for free....