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

Variants of Derivatives 87
significance, the structured finance products, especially collateralized debt obligations
(CDOs), will be presented last and in more detail.
Non-Conditioned Futures and Forwards
Futures transactions are standardized transactions which enable the acquisition or
sale at the present time of a commodity, a currency, a certain interest rate, or a
share, at a certain price and at a certain point in time or period of time in the future.
Futures are standardized by contract size and expiry term, and are transacted on the
stock exchange via a bank or broker. Forwards are the same transactions without the
standardization, transacted by individually negotiated contracts. The contract size
and expiry terms for forwards are defined according to the wishes of the contract
partners.
Conditioned Futures: Options
An option is the agreement whereby one contract partner is assured of the unilateral
right to buy or sell a quantity of the good or an asset defined in advance at
a fixed price within a defined period of time. For this agreement, a premium is
paid. The value of the agreement is determined by the payment of the premium,
known as the option premium. The option contract can be individual or standardized.
Standardized options are traded on certain stock exchanges; in Germany, for
instance, on the options and financial futures exchange EUREX.
The economic function of derivatives is, in exchange for the payment of a fee, to
transfer the risk of a movement of value of an underlying asset from the party that
does not want to bear it to another party that is willing to bear the risk. The buyer of
a call option, to be able to buy a share at a certain value at a certain future point in
time, transfers the risk of the share’s movement in value to the seller of this option.
The buyer expects the share price to rise, but does not want to bear the risk of the
price movement; the seller is prepared to bear the risk of the price trend because he
expects a fall in price. Both the buyer and the seller of the option are placing wagers
in contrary, but complementary, directions on the price trend of the share. The buyer
is prepared to pay the seller a fee for assuming the price risk; the seller is prepared
to bear the price risk in exchange for this fee.
Swaps: A Sequence of Forwards or Options
Swaps are obligations to exchange payment flows. Their purpose is to stabilize
payment flows, especially of interest payments. Interest-rate swaps together with
credit-default swaps make up the most important class of swaps. Other categories
that exist are currency swaps, equity swaps and commodity swaps. A swap contract