(10 points) HIBOR and Prime Rate (Urgent)

1. When capital leaves HK, the available cash within the market for interbank borrowing becomes lesser and so the rate goes up (same theory in demand & supply). And the interest of interbank borrowing is called HIBOR.

2. When the HIBOR goes up and is foreseen to stay for quite a long period, it means the cost for cash borrowing goes up. Then, it needs to increase the Prine Rate so as to justify the lending business and maintain the profit. Of course, there are other concerns when deciding to increase the Prime Rate. For example, if one major leading bank do have hugh cash on hand, he may not increase the P. If he do not increase the P, other banks may not increase too as they have to consider the competitiveness in the market.

3. If US P rises and HK does not follow, most of money will go to US$ as they are pleaded (capital is considered to be fixed) and investor can get higher return cos US offers a higher deposit interest rate. Correspondingly, HK needs to raise the P. This is same theory of ans 1. So most likely, HK will follow US P.