Banking Industry: Structure and Competition - Financial innovation and growth of shadow banking system - Responses to change in demand conditions

4 important questions on Banking Industry: Structure and Competition - Financial innovation and growth of shadow banking system - Responses to change in demand conditions

What was the effect of interest-rate volatility?

Increased demand for financial products and services that could reduce that risk, resulted in an increase creation of new financial instruments to help lower interest-rate risk.
Result: appearance of financial derivatives in the 1970s

How did products offer help (hedge) to protect investors and financial institutions against interest-rate risk?

By commodity exchange

How was this hedging created?

Trough future contracts were seller agrees to provide a certain standardized commodity to the buyer on a specific future date at an agreed-on price
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Until 1975 there were only commodities on which the future contracts were created, what came after?

future contracts in financial instruments – pay off linked to previously issued securities to hedge risk

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