Recent Innovations in Interest Rate Risk Management and the Reintermediation of Commercial Banking
Keith C. Brown
Donald J. Smith
Financial Management 17, 1988, pp. 45-58
In response to increased competitive pressures on their traditional business activities, many money-center commercial banks have begun to actively search for new ways to produce fee-based income. A promising development has been the creation of products and techniques designed to manage the interest rate exposure of a corporate client. However, since many of these new products are traded in the over-the-counter markets, the role of the banking system is not as yet well understood. Our purpose in this paper is to outline the structure and applications of these interest rate risk management vehicles. With the advent of this activity, we argue that commercial banks are properly thought of as being an intermediary between futures and options exchanges and the ultimate corporate user of the hedging product.
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