INTERNATIONAL FINANCE

Global Financial Crisis are Implications of Ethical Dilemmas in Practice

ByTahsen Alqatawni

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W. Callian

DERIVATIVE(1 OF 2)

A derivative is a financial instrument that derives or gets it

value from other financial instrument (a bond, a currency or

a commodity or stock) that is known as the 'underlying'

instrument (Cutland, 2013).

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DERIVATIVE(2 OF 2)

Since the early 90s, the globalizations are accelerating. This caused

the world economy to serious structural shifts. These issues arise

during increasing of competitive pressure. During that period, featured a lo

of new financial instruments and the most important one it is the financial

derivatives.

“trading in derivatives is a zero sum game: One derivatives trader’s gain is

necessarily balanced by another’s loss”(Heinemann, 2011).

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COMMON FINANCIAL DERIVATIVES (1 OF 6)

Option: The purchaser of an Option has rights without any obligations to buy or sell the asset during a given time for a specified price.

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COMMON FINANCIAL DERIVATIVES (2 OF 6)

Forward Contract: is a non-standardized contract between

two parties. whoever, they are obligated to trade a security

or other asset at a specified date in the future.

Future contract: is standardized, transferable, exchange-

traded contract to buy or sell a standard quantity and

quality of an asset or security at a specified date and price.

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COMMON FINANCIAL DERIVATIVES (3 OF 6)

Stripped Mortgage-Backed Securities (CMBS): A stripped mortgage that are split into principal-only strips and interest-only strips, which based in cash flow that derives exclusively from interest payments or principal payments on the underlying mortgages (De Rossi, 2010).

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COMMON FINANCIAL DERIVATIVES (4 OF 6)

A Swap: is the simultaneous buying

and selling of the same security or obligation

(e.g. Fixed-for-floating rate swap).

The opposite of plain vanilla options are exotic options, which are more complex

than the components of a traditional financial instrument (Borak, 2013).

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COMMON FINANCIAL DERIVATIVES (5 OF 6)

Structured Notes are hybrid combine of debt instruments and derivative elements that include several financial products, which not necessarily reflect the risk of the issuer. "The combination allows parties to identify, isolate, transfer, and otherwise manipulate risk in clearly defined ways"(Telpner, 2004).

“Structured notes are beware of Wall Street’s latest 'safe' investment”( Revell, 2011).

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COMMON FINANCIAL DERIVATIVES (6 OF 6)

A hedge fund is a private investment vehicle target very wealthy investors, that promise great rewards. Whoever it may also use leverage, which present great risk and the huge potential rewards. "Hedge funds employ instruments such as derivatives to gamble with their clients“ (Whalen, 2007). In 2010, Allen stated “Hedge Funds Accused of Gambling with Lives of the Poorest as Food Prices Soar”.

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THE UGLY FACE OF DERIVATIVES (1 OF 1)

The Financial derivatives turned into a source of gambling or risk taking, and expansion to very large volume.

According to the bank for international settlements (BIS)the volume of these derivatives increased by more than three times in the past few years(2011).

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BACKGROUND(1 OF 1)

The current global financial crisis, it is result of unethical

practices of the companies' leaders and their financial

management “the existing issue came to be the

determination of the blameful for disaster and financial

managers, which act with their immoderate selfishness, and

greediness was suspect of putting the global economic on

the brink of an abyss” (Akif, 2011). Many unethical issues

were arising during this crisis, such as they are putting

shareholder wealth and small investor at risk.

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UNETHICAL DILEMMAS IN DERIVATIVES PRACTICE

(1 OF 3)

The greed and selfishness are the most important characteristi

cs of most financial managers. It was observing lack of ethics.

the financial company pushed the prudence and ethics aside

as greed overcame good judgment among mortgage lenders

nationwide.

The lack of a qualified ethical analysis is the major reasons of

financial management mistakes (Heinemann, 2011).

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UNETHICAL DILEMMAS IN DERIVATIVES PRACTICE

(2 OF 3)

Adopt a situational view of morality result of the modern

economy, requires that we choose the course of action that

maximizes instant profits, and supports any decision that

maximizes individual financial profit (Russell, 2012).

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UNETHICAL DILEMMAS IN DERIVATIVES PRACTICE

(3 OF 3)

When the economies are growth, ethics are seeing as an

unimportant issue like luxury goods. However, at times

when economic and financial crises happen the ethical

issues turn out to be one of the most significant topics at the

first item on the agenda (Akif, 2011).

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ANNOTATED BIBLIOGRAPHY(1 OF 10)

Akif, M. (2011). Global Financial Crisis from an Ethical

Perspective. Research Journal of Internatıonal Studıes-Issue, 82.

The author discussed how the unethical finance practice created the

global economic crisis. In addition, the study explored the unethical

issues were arising during this crisis, such as they are putting

shareholder wealth and small investor at risk. The author suggested

the solution for it would require a new mentality change of investor

and financial mangers. Therefore, a part of solution lies in the

formation of heavier arrangements.

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ANNOTATED BIBLIOGRAPHY(2 OF 10)

Allen, K. (2010). Hedge funds accused of gambling with lives of

the poorest as food prices soar. The Guardian, 19.

The article discussed how the growing role of hedge

funds and banks in the commodities markets in 2010, during

which time some of core the commodities price had fluctuated

dramatically. Whoever, the author assumed Financial

speculators had come under resumed fire from anti-poverty

campaigners for their gamble on food prices. 

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ANNOTATED BIBLIOGRAPHY(3 OF 10)

Helleiner, E. (2011). Understanding the 2007-2008 global financial crisis:

Lessons for scholars of international political economy. Annual

Review of Political Science, 14, 67-87.

The author discussed the global financial crisis economists

explanation, and a reference to several market and regulatory

failures as well as a macro-economic environment of poor credit

during the précis's period. In addition, the role of global capital

flows in fueling the U.S. financial bubble. Whoever, the economists

accurately identified many of the risks associated with new models

of securitization, as well as attending regulatory failures and the

politics underlying them.

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ANNOTATED BIBLIOGRAPHY(4 OF 10)

Russell, K., Dortch, M., Gordon, R., & Conrad, C. (2012). Ethical

Dilemmas in the Financial Industry. Case Studies in Organizational

Communication: Ethical Perspectives and Practices, 35.

The author discussed the financial derivatives and responsibility,

and how to deal ethically with financial risk. In addition, the

study tries determined who is responsible for the risks generated

on financial markets, and which aggregate level of financial risk

does the  society have to carry. The study assumed the lack of a

qualified ethical analysis is the major reasons of financial

management mistakes.

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ANNOTATED BIBLIOGRAPHY(5 OF 10)

Heinemann, S. (2011). Financial Derivatives and Responsibility–

How to Deal Ethically With Financial Risk. Finance & Bien

Commun, (1), 45-56.

The author discussed the financial derivatives and responsibility,

and how to deal ethically with financial risk. In addition, the

study tries determined who is responsible for the risks generated

on financial markets, and which aggregate level of financial risk

does the  society have to carry. The study assumed the lack of a

qualified ethical analysis is the major reasons of financial

management mistakes.

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ANNOTATED BIBLIOGRAPHY(6 OF 10)

Carrigan, M., & De Pelsmacker, P. (2009). Will ethical consumers sustain their

values in the global credit crunch?. International Marketing Review, 26(6),

674-687.

The study explores the impact the global recession had upon customers and

marketers, and recognizes the evidence envelope concerns that the demand for

ethical outputs will decline across global markets as the recession deepens.

In addition, the author offers a balanced perspective on the importance

of ethical consumers to global marketers. The study highlights a number of

threats and opportunities that exist in the modern global recession, and the discussion

illustrated with different examples of successful marketing ethics in action.

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ANNOTATED BIBLIOGRAPHY(7 OF 10)

Karaibrahimoğlu, Y. Z. (2010). Corporate social responsibility in

times of financial crisis. Afr. J. Bus. Manage, 4(4), 382-389.

The study examined the effects of the global financial crisis on the

number and size of CSR projects, and why they failed to balance

the expectations of relevant parties. Therefore, the author

explored the reasons make the organizations choose not to

engage in CSR projects. the study examined 100 randomly-

sampled global companies. The study result found that there is a

significant decline in numbers and extent of CSR projects in times

of the global financial crisis.. 21

ANNOTATED BIBLIOGRAPHY(8 OF 10)

Lewis, V., Kay, K. D., Kelso, C., & Larson, J. (2010). Was the 2008 financial crisis

caused by a lack of corporate ethics?. Global Journal of Business Research, 4(2), 77-84.

The purpose study to answer the specific question that: was the 2008 Financial

Crisis Caused by a Lack of Corporate Ethics?. the study discussed the unethical

lending practices by major lending institutions, which destroyed the U.S financial

markets, and eventually all major world markets. The author discussed how the

financial company pushed the prudence and ethics aside as greed overcame good

judgment among mortgage lenders nationwide, and how this company sold the

crooked loans to inexperienced buyers.

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ANNOTATED BIBLIOGRAPHY(9 OF 10)

Friedman, H., & Friedman, L. (2009). The global financial crisis of

2008: what went wrong?. Available at SSRN 1356193.

The purpose study to answer the specific question that: was the

global financial crisis of 2008: what went wrong?. However, the

author discussed how the entire world learned important

lessons from this financial meltdown, and unethical action has

many consequences on all financial world. The author

explained how This debacle could not have take place if the

parties involved had been socially honest and not driven by

greed.

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ANNOTATED BIBLIOGRAPHY(10 OF 10)

Giannarakis, G., & Theotokas, I. (2011). The effect of financial crisis

in corporate social responsibility performance. International

Journal of Marketing Studies, 3(1), p2.

The study discussed the effect of the financial crisis in Corporate

Social Responsibility, and conducted an empirical analysis based

on companies that implement Global Report Initiatives (GRI)

reporting guidelines modifying the application level in a point

score system. in addition, the study discussed the CSR

performance and financial report during the financial crisis.

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REFERENCES(1 OF 4)

Akif, M. (2011). Global Financial Crisis from an Ethical Perspective. 

Research Journal of Internatıonal Studıes-Issue, 82.

Allen, K. (2010). Hedge funds accused of gambling with lives of the poorest

as food prices soar. The Guardian, 19.

BIS, (2012). Semiannual OTC derivatives statistics at end June 2011. Bank for

international settlements. Retrieved from: 

http://www.bis.org/statistics/derstats.htm

Borak, S., Härdle, W. K., & López-Cabrera, B. (2013). Exotic Options.

InStatistics of Financial Markets (pp. 101-118). Springer Berlin Heidelberg.

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REFERENCES(2 OF 4)

Cutland, N. J., & Roux, A. (2013). Derivative Pricing and Hedging.

In Derivative Pricing in Discrete Time (pp. 1-9). Springer

London.

De Rossi, G., & Vargiolu, T. (2010). Optimal prepayment and

default rules for mortgage-backed securities. Decisions in

Economics and Finance, 33(1), 23-47.

Heinemann, S. (2011). Financial Derivatives and Responsibility–

How to Deal Ethically With Financial Risk. Finance & Bien

Commun, (1), 45-56.

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REFERENCES(3 OF 4)

Revell, J. ( 2011, August 30). Structured notes: Beware Wall Street's latest

investment. Retrieved from

http://money.cnn.com/2011/08/29/pf/structured_notes_beware.fortune/ind ex.htm

Russell, K., Dortch, M., Gordon, R., & Conrad, C. (2012). Ethical Dilemmas in the

Financial Industry. Case Studies in Organizational Communication:

Ethical Perspectives and Practices, 35.

Telpner, J. S. (2004). A survey of structured notes. The Journal of Structured

Finance, 9(4), 6-20.

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REFERENCES(4 OF 4)

Whalen, R. C., & Mallaby, S. (2007). Risk-Return Profile. Foreign

Affairs, 86(3), 162-164.

THE END

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