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

86 6 The Ethical Economy of the Market for Derivatives
contract enables the quality and price of a good to be specified for delivery at a
certain future point in time. Non-conditioned futures are differentiated into futures,
which are standardized and exchange-tradable, and forwards, which are individually
negotiated and non-exchange traded. The latter are known as “over-the-counter”
(OTC) contracts.
Conditioned futures, known as options, heighten the complexity further. The
option specifies the delivery of a good at a certain price at a certain point in time,
contingent upon a specified condition concerning the value of the underlying; for
instance, that the price of a specified index has reached a certain predefined price,
which then determines the price of the (index) option.
Futures that are not conditioned, i.e. not dependent on the realization of a predefined
condition, must be executed by the buyer, whereas options, as futures
conditioned by another factor, may or may not be exercised by the option buyer.
Both conditioned and non-conditioned futures incorporate future time into present
time. The speculation on which the futures transaction is based is a heightened form
of speculation. Unlike simple speculation, it is not merely arbitrage between points
on the time axis from the present onwards, where the future point in time at which a
good will be sold is left undecided; instead, it nominates a point in time (European
options) or a time period (American options) in the future as well as a purchase or
sale price. It anticipates the future in precisely specified conditions. Because it is
designed to be dependent on the price movement of a good, not just in the future
in general but at a fixed future point in time, it is characterized both by its higher
contingency on a certain future point in time, but also by the certainty it provides for
one of the contracting parties about the value of the option at a certain future point
in time.
Derivatives are financial instruments, the prices of which are aligned with price
changes or the price expectations of other investments. The party that accepts the
risk, the derivative writer, undertakes to provide a financial service if a certain value
of the underlying occurs. In order to create incentives for the derivative writer,
derivatives must be constructed in such a way that they disproportionately reflect
fluctuations in the prices of these investment assets. They can be used both to hedge
against losses and, because they respond disproportionately to fluctuations in the
price of the underlying asset, to speculate on price gains.
Variants of Derivatives: Futures, Options, Swaps, Structured
Finance and Investment Products
The most important derivatives are futures, options, swaps and structured finance
and investment products, which will be briefly presented here. Because of their
used by MÜLLER-MÖHL (2002), p. 22, since the latter has connotations of urgency or exigence
that are out of place here.