Risk Management and the Ethics of New Financial Instruments

Option theory, swaps and securitisation are the massive changes of the last twenty years in the financial markets. Of these only the first is ‘new’, relying principally on the mathematics of the model developed by Black and Scholes. However, swaps and securitisation have had such a radical and creative effect on the way in which finance is considered that they have changed the whole landscape of large-scale, especially corporate, financing. Everything else is basically derivative, with the scale of dealing being the only reason to attract attention. By contrast, the long and widespread history of futures is demonstrated by my regular discussions in the local undertaker’s hearse with one of the bearers, whose main job is farming, on the futures prices in potatoes, which have varied from £0.70–£5 per bag in the last two years.