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

Hedging and Speculation 93
insurance which guarantees the future price or safeguards against future price fluctuations
for non-speculators. Speculation in the spot market for corporate shares
reassures the non-speculative investor that he can expect to encounter demand for
his shares whenever he wants to sell them and thus disinvest. In the same way as
the speculation-induced increase in spot-market trade in corporate shares provides
insurance for those who want to be free to decide on the time-period and duration of
their investment and disinvestment in corporate shares, because liquidity is always
good in the stock market, the market for futures, options and structured products is
a possibility of insuring oneself against price fluctuations through the purchase of
futures, options or structured products on the basis of the liquidity in this market.
This insurance can also be effectuated on an individual basis without an organized
market, but is made more difficult, without an organized market, by the necessity of
finding a contract partner and by the lesser liquidity of the supply.
In the market for futures, options and structured products, the division of labor
between the speculating market participants and those who want to limit their risk,
or practice hedging, comes about because some people must speculate so that others
can calculate with assured, or even certain, future prices. In the spot market for
corporate shares, the effect of speculation is not to protect future prices but to ensure
that the time periods of investment in shares will be transformable in future, by
virtue of the fact that they can be sold or bought at any time – if not at the same
price – on the stock exchange.
From this consideration it becomes apparent that speculation supports liquidity
in the market. The value creation effectuated by speculation is thus derivative. At
the same time, it is clear that there can be an excess of speculation, namely when
more speculation is taking place than is necessary to protect liquidity, and when
speculation inflames rather than dampens the volatility of asset values.
Is there unnecessary speculation in the derivatives market? Speculation is essentially
a wager on future price changes. Speculation in derivatives is a wager to the
power of two. Not only is it a wager on the future, on future values of a given
factor; it is also a wager about the effect that a nominated value of that factor will
have on the future value of another factor at a nominated future point in time. It
is evident that the winnings from the wager, if the wager is successful, are higher
for the derivative wager than for the simple wager on the future value of shares
or commodities. The prerequisite for a wager is to find someone who will place a
counter-wager. Somebody who wants the protection of an interest-rate swap because
he expects future interest-rate rises must find another party for the swap who will
place the counter-wager that interest rates will fall. Since both parties have opposite
but complementary future expectations, nothing stands in the way of their wager. In
the case of derivatives, unlike other wagers, part of the stake is paid as a fee.
Anyone can use a wager to hedge against anything with anyone, if they both have
opposing but complementary expectations about the future. The case is theoretically
possible that half of the entire gross national income is staked by one half of the population
on Ax, where x = 1...n, and by the other half of the population on not-Ax,
x = 1...n. The macroeconomic value-added effect of this total wager is, however,
zero because macroeconomically it is a zero sum game. Moreover, since wagering
costs must also be reckoned – i.e. the commissions and fees charged in the financial