The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

Futures and Options 85
They are structured combinations of shares and options, or of loans and options,
which link the credit and capital market with the market for futures and options. For
this reason, in accordance with the scheme of classification into credit, capital and
derivative markets, they will be dealt with separately here following the examination
of the credit and capital market.
The derivative portion of structured products is an element of an investment strategy
of intentional exposure to higher risk coupled with the use of higher leverage.
Speculation is the pivotal motive for this derivative strategy. A structured product
can also be used for hedging, however.
The hybrid makeup of structured products and derivative products is the root
cause of the great complexity of these financial products, which is frequently sufficient
to defeat the understanding of their sellers and buyers, not to mention the tax
authorities. 5 It is also the reason for the high costs of these products, which result
from the less than entirely transparent or verifiable fees charged by the banks. As
one financial intermediary said, the banks have their own reasons for offering structured
products: “The game is stealing money”. Extra profits are also the reason for
the banks’ practice of buying each other’s loans, or the risk of each other’s loans, or
both, in the form of CDOs.
Futures and Options: Non-Conditioned and Conditioned
Forward Transactions
Derivatives encompass, firstly, the trade in financial instruments or other goods at a
certain point in the future, known as forward transactions or futures, and secondly,
the trade in financial instruments or other goods based on a condition to be realized
at a certain future point in time, known as conditioned forward transactions or
options. 6 Unlike the spot or cash market, in which direct deals are made for immediate
payment and delivery of the object of the contract, the contracts concluded
on the futures and options markets are for a deal that will take place in the future.
Derivatives or derivative financial instruments are usually derived from assets such
as shares, bonds and commodities, or from reference rates such as currencies, interest
rates or indices. The underlying object is not fixed, and can be any kind of asset.
Derivatives can also be seen as wagers on the price movement of an underlying asset.
The object of a non-conditioned or fixed forward contract 7 is the delivery of
a good at a certain price at a certain point of time in the future. The forward
5 On the complexity surrounding the taxation of hybrid financial instruments, cf. the Directive of
the Australian government: http://www.treasury.gov.au/documents/196/PDF/round6.pdf
6 For a clear presentation on options and futures in the markets of the German-speaking countries,
including options and futures pricing, cf. ERNST MÜLLER-MÖHL: Optionen und Futures.
Grundlagen und Strategien für das Termingeschäft in Deutschland, Österreich und in der Schweiz,
Stuttgart (Schäffer-Poeschel) 5th edn. 2002.
7 In the German-speaking discussion, the term “nicht bedingtes Termingeschäft” (non-conditioned
future) seems more appropriate than the term “unbedingtes Termingeschäft” (unconditional future)