Introduction To The Main Derivative Contracts Finance Essay - Free Essay Example

Sample details Pages: 16 Words: 4740 Downloads: 5 Date added: 2017/06/26 Category Finance Essay Type Argumentative essay Did you like this example? According to the Bank of International Settlements (1995), a derivative is defined as a contract whose value depends on the price of underlying asset, but which does not require any investment of principal in those assets. As a contract between two counterparties to exchange payments based on underlying prices or yields, any transfer of ownership of the underlying asset and cash flows becomes unnecessary. Derivatives play a large and increasingly important role in financial markets. Derivatives markets for financial variables were developed back in 1970, and are still dominated by all financial institutions which actively market their products and services to corporate, institutional and government clients. Don’t waste time! Our writers will create an original "Introduction To The Main Derivative Contracts Finance Essay" essay for you Create order Bodie (2009, pg 671) explains that the value of derivatives is said to be derived from other securities. They are also called contingent claims due to the fact that their payoffs are contingent on the prices of other securities. Financial institutions use derivatives in order to hedge and speculate assets which are subject to price fluctuations. Forwards, swaps and options are regularly traded outside exchanges by financial institutions and their corporate clients in what are termed the over-the-counter (OTC) market. At the same time futures are actively traded on many exchanges. The derivatives highlighted in this dissertation will fall under four main headings, namely: Forwards, Futures, Options and Swaps. 2.2 Forwards Forwards are binding contracts between two financial institutions or between a financial institution and one of its clients. Hull (1997, pg.2) explains that when entering into forwards contracts, one of the parties assumes a long position in the contract. This means that the party agrees to buy the underlying asset at an agreed price today at some specific date in the future. At the same time, the other party in question takes a short position as one agrees to sell the same asset at the negotiated price for the same specific date. The forward contract is worth zero when initiated due to the fact that it costs nothing to take either a long or a short position. The party who is in a short position transfers the agreed asset to the party who is in the long position in return for the delivery price. Foreign exchange forward contracts are very popular with banks. This is because they hedge exchange rates to offset any fluctuations in prices of currency. In fact most banks have a forward desk, within a foreign exchange trading room, to carry out these contracts. 2.2.1 Example of a Forward Contract Consider a farmer who grows wheat. The entire planting seasons revenue depends critically on the highly volatile crop price. The miller who must purchase wheat for processing, faces the same portfolio problem as the farmer. The latter is subject to profit uncertainty because of the unpredictable future cost of the wheat. Both parties can reduce this source of risk by entering into a forward contract binding the former to deliver the wheat at a pre-agreed price, say $100, on a specified date, and say 1st January 2010, regardless of the market price. In other words we can say that the miller has a long forward contract in wheat whilst the farmer has a short forward contract in wheat. 2.2.2 Payoffs from Forward Contracts Since both parties agree on a fixed price, when the contract is signed, one of the parties involved will gain whilst the other will lose when the latter is compared to the market price on maturity. Keeping the above example in mind, if the market price on 1st January 2010 is $110, the miller is still allowed to buy the wheat at $100, thus increasing the millers value by $10. In general, the payoff from a long position in a forward contract on one unit of an asset is St K Equation : Payoff from a Long Position Where K, is the delivery price and St is the spot price of the asset at maturity of the contract. This equation can also be explained in figure 1, where it clearly shows that as the spot price of the asset increases the payoff for the buyer increases thus, making the value of the buyer even greater. +10 Payoff K=$100 $110 0 St Figure : Long Position Conversely, if let us say the price on the market is $90 per bushel of wheat, the miller is obliged to purchase the bushel at $100 due to the forward contract. The payoff from the short position in a forward contract on one of an asset is K St Equation : Payoff from a Short Position Payoff Figure 2 graphically illustrates that if on maturity the spot price is less than the pre-determined price the payoff for the seller increases resulting to an even higher value. +10 $90 K=$100 St Figure : Short Position 2.3 Futures A futures contract is also a binding contract between two parties who agree to exchange an asset at a pre-agreed price, called the futures price, which is to be paid on maturity. Again, the trader who commits to purchase the asset on the delivery date takes a long position whilst a short position is taken by the trader who delivers the asset in question. One of the main differences between forwards and futures, noted by Hull (1997, pg 3), is that futures are not traded over-the-counter but through an exchange. Thus, standardised features must be included in order to make trading possible. Another difference, also explained by Hull (1997, pg 3,) is that the two parties do not necessarily know each other due to having an exchange mechanism in between. This exchange provides a guarantee that the contract will be honoured on maturity date. 2.3.1 Specification of the Futures Market Since future contracts mostly deal with commodities, the exchange must specify in some detail the exact nature of agreement between the two parties. Specifications are mainly found in the following alternatives which are also shown in Appendix 1: Asset: as we are dealing with commodities, variations in quality may be found. Therefore, the exchange stipulates a benchmark grade in order to classify the quality of the product. Product size: the exchange denotes the exact amount of the commodity that needs to be delivered. Delivery arrangements: these arrangements are very important and are clearly explained by the Chicago Mercantile Exchange Group (CME). The clearing house defines the exact procedure of settlement between the parties. The timeline, obligations for the buyer and seller, delivery costs, payment instructions, etc are all explained in detail to eliminate any misunderstandings. Price quotes: the futures price is quoted in a way that makes it easy to understand for any user. For example on the New York Mercantile Exchange (NYMEX), Natural Gas is quoted in dollars per 10,000 million British Thermal Units (mmBtu). Daily price movement limits: keeping Natural Gas as an example, the minimum and maximum price fluctuations are also given by the NYMEX. In fact this commodity has a $0.001 per mmBtu as a minimum price fluctuation whilst a $3.00 per mmBtu for all months as the maximum price fluctuation. Position limits: an investor can only hold a specified amount of contracts. The CME positions the limit at 1000 contracts per speculator, who cannot receive more than 300 contracts within one month. 2.3.2 Characteristics of the Futures Market One of the main features of a futures market is that the contract takes place through a broker or an exchange. The latter will require a deposit by both the buyer and the seller. This is a risk-reducing mechanism as the deposit amount serves as an element that bounds both parties not to default. Futures contracts are also valued on a daily basis, thus marking the market. For example: Day 0 1 2 3 4 5 Total Price $100 $101 $102 $101 $100 $99 Buyer +1 +1 -1 -1 -1 -$1 Seller -1 -1 +1 +1 +1 +$1 Table : Marking the Market On day 1 the buyer makes $1 profit; another $1 on day 2; makes a loss of $1 on day 3; loses $1 on day 4 and finally loses another $1 on day 5. Over the 5 days the buyer lost a $1 from the beginning till the end of the contract whilst the seller gained $1 from the contract. During this period, the accounts of the parties in question were being charged and credited in accord ance with the fluctuation in the contract. This is why a futures contract is normally said to be a string of one day forward contracts. Futures contracts must be standardised. They cannot be tailor-made according to the buyer as in the case of forward contracts. Also when entering into futures, the buyer knows that if one wants to purchase corn, the trader would know the common characteristics for each and every commodity. Futures contracts are also very liquid due to the fact that buyers may decide to terminate the contract earlier than maturity by simply selling back the contract to the broker, where the latter will find another trader. 2.3.3 Payoffs from a Future Contract When the broker provides a full detailed description as to when, where and what will be delivered, the party with the short position, according to Hull (1997, pg 29), sends a notice of intention to deliver to the exchange. The price paid is normally the settlement price. The exchange will then select a party with an outstanding long position to accept delivery. 2.3.4 Types of Future Markets Future markets can be either in Contango or else in Backwardation as shown in figure 4. Future Prices Bodie (2009, pg 781) says that a futures market is said to be in Contango when the futures price is above the expected future spot price. Conversely, Backwardation is when the futures price is below the expected spot prices. Contango +10 E(Pt) Normal Backwardation Delivery Date Figure : Types of Futures Markets 2.4 Options According to Aristotle (1952, pg.453), an option can be described as a financial derivative which involves a principle of universal application. These contracts have initiated since 1973 when the Chicago Board Options Exchange (CBOE) began listing companies on the national exchange. Bodie (2009, pg 671) states that when these contracts were introduced on the markets they were a huge success, crowding out the previously existing OTC trading in stock options. An option is a different contract to forwards and futures. The differences are summarised by J.P Morgan and Arthur Andersens as stated in Reynolds (1995) who said the advantage of options over swaps and forwards is that options give the buyer the desired protection while allowing him to benefit from a favourable movement in the underlying price. Thus options give the right and not the obligation to buy or sell an underlying asset, for a pre-determined price and by a certain date in the future. Since this derivative is based o n rights, the holder will not exercise the contract if it is not profitable. In exchange for this right, the holder is bound to pay a premium which would be lost if the contract is not exercised. Nowadays, options are traded on many exchanges all over the world, starting from OTC by banks and also by many other financial institutions. The underlying assets can vary from stocks, stock indices, commodities, currencies, securities in warrants, etc. One major distinction between American and European options is that the former options can be exercised at any time up to the expiry date, whilst the latter options can only be exercised on the date of maturity. There are two types of options which will be explained in the following sub-headings. 2.4.1 Call Options Willmott (1998, pg 22) defines a call option as the right to buy a particular asset for an agreed amount at a specified time in the future. A call option can also be divided into a Buy or a Sell call. A buy call is the right to buy the underlying asset at an agreed price today at some agreed day in the future. When considering a sell call, the holder has the obligation to sell the asset, at a fixed price and date, when the buy call holder decides to exercise the call option. If the buy call holder decides that it is better to purchase the asset from the market, the seller of the call will gain the premium paid by the buy call holder. 2.4.2 Example of a Call Option Consider a call option on IBM stock which gives the holder the right to buy a share of IBM at a strike price of $105 in six months time. The buy call holder also paid a premium of $5. If on the expiration date the price of 1 IBM share is less than $105, say $103, the buy call holder would not exercise the option but buy the share directly from the stock exchange, thus, only losing the $5 premium. This is clearly explained in figure 5: Profit ($) $110 +$5 Stock Price ($) 0 $103 -$5 $105 Figure : Buy Call Profit ($) +$5 $110 $103 $105 Stock Price ($) 0 -$5 Figure : Sell Call Conversely, if IBM stocks are selling above $105, say $ 110, the call holder will find it optimal to exercise the option as one would make $5 profit. (Tough in reality, the proceeds from the exercise will just cover the original cost of the call.) 2.4.3 Put Options Willmott (1998, pg 22) also defines put options as the right to sell a particular asset for an agreed amount at a specified time in the future. A put option is also divided into a Buy or a Sell put. A buy put gives the holder the right to sell an underlying asset at a fixed price and date. In these types of options the buyer is also bound to pay a premium which will be lost if the latter does not exercise the option. A sell put option guarantees the buyer, that the holder will purchase the asset at the same fixed price and date. Similarly to call options, the buy put holder decides whether to exercise the option or not. If the option is not exercised the only thing gained by the sell put holder is the premium. 2.4.4 Example of a Put Option Profit ($) Consider that two parties agree to exchange an IBM share at an exercise price of $105 in six months time. The buy put holder also pays a premium of $5. If an IBM stock is being bought on the market at $110, the buyer is better-off to sell on the market, though still losing the $5 premium. +$5 Stock Price ($) $110 $105 0 $100 -$5 Figure : Buy Put Profit ($) +$5 $100 Stock Price ($) $110 $105 0 -$5 Figure : Sell Put Contrary, if prices on the market are less than $105, say $103, the holder is better-off to sell the share to the put writer as one would be gaining $2. 2.5 Swaps Coyle (2000, pg2) states that swaps were developed in 1979 by major commercial and investment banks to serve as an instrument for debt management and interest rate management. Willmott (1998, pg 419) defines a swap as an agreement between two parties to exchange, or swap, future cash flows. The exchange is made up of a stream of payments which are pre-negotiated over an agreed period of years. Therefore, the study of swaps, as mentioned by Bodie (2009, pg 804), is a multi-period extension of forward contracts. Thanks to swaps, Oldani (pg 2) explains that new investment opportunities were invented to hedge against any risk and also to speculate. 2.5.1 Types of Swaps Swaps can be sub-divided into three categories. These are: Equity Swap The two counterparties agree to exchange an amount of payments based on the performance on an equity index. The total return on the index measures this equity component. Commodity Swap In this type of swap both parties exchange cash flows based on commodity prices. One party agrees to pay a floating price based on the commoditys average price over a period whilst the other party pays a fixed price on an underlying quantity of the commodity. Credit swaps Credit swaps are sub-divided into: Currency swaps According to Willmott (1998, pg 424) these swaps are exchanges of interest payments in one currency for payment in another currency. The interest payments swapped can be either fixed, floating or one of each. It is important to note that there may be an exchange of the principal at the beginning and the end of the contract. Consider that two companies, A and B one in US and the other in UK respectively, enter into a currency swap for a principal amount of $50 million. The exchange rate at the date of the currency swap is: $ 1.25 = ÃÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã… ¡Ãƒâ€šÃ‚ ¬ 1.00 $ 1.00 = ÃÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã… ¡Ãƒâ€šÃ‚ ¬ 0.80 Principal = ÃÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã… ¡Ãƒâ€šÃ‚ ¬40mPPP Principal = $50m A B As mentioned earlier, the firms exchange the principal amounts at both the beginning and end of the year, thus as shown in the following figure, A pays B $ 50 million whilst B pays A ÃÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã… ¡Ãƒâ€šÃ‚ ¬40 million. Figure : Currency Swap (a) During the period both parties are assumed to pay interest on the loan to each other. The intervals of when interest payments are specified in the swap agreement, and let us consider that both parties agreed to pay fixed interest rates annually based on the following rates. Dollar-dominated interest rate is 8.25% Euro-dominated interest rate is 3.50% Company A is receiving a euro loan and thus is bound to pay ÃÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã… ¡Ãƒâ€šÃ‚ ¬ 40 million x 3.50% = ÃÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã… ¡Ãƒâ€šÃ‚ ¬ 1400000 in interest. Company B is receiving a dollar loan and thus is bound to pay A $ 50 million x 8.25% = $ 4125000 in interest. Due to hedging oneself from future fluctuations in exchange rates, at the termination of the contract, both parties would simply pay back the original principal amounts as shown in figure 10. B A Principal = ÃÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã… ¡Ãƒâ€šÃ‚ ¬40m Principal = $50m Figure : Currency Swap (b) Interest rate swap According to McCaffrey (2009), the most common and simplest swap is the plain vanilla interest rate swap. These types of swaps call for one party to pay interest at a fixed rate to a second party, whilst the latter pays the former a floating interest rate. In the types of swaps, the two cash flows are paid in the same currency. Muscat (2009, pg 34) explains that the cash flows being exchanged are not exchanged between the two parties, thus there is no need to borrow money. Consider that company A and B enter into a five year swap where A agrees to pay B a fixed rate of 5% on a notional principal of $ 10 million. On the other hand B agrees to pay A floating interest rate of LIBOR = 2 % to A on the notional principal of $ 10 million. Fixed 5% B A Floating LIBOR+2% Figure : Interest Rate Swap Both parties agreed to pay interest annually and thus at the end of the year A has to pay B $ 10,000,000 x 5% = $ 500,000 as interest. At the same date the one-year LIBOR rate was 5.7%, thus B has to pay A (5.7% + 2 %) x 10,000,000 = $ 770,000 as interest. In this case in order to eliminate unnecessary transactions, the amounts are off-set resulting B paying $ 22,000 to A only. 2.6 The Black-Scholes Model Pricing a derivative is relatively hard and complex. In fact many financial economists searched for years for a workable option-pricing model. In 1997, Scholes and Merton shared a Nobel Prize in Economics as they managed to come up with the Black-Scholes pricing formula. With the CAPM as a background, Black (1987, pg 637) said that I started working on a formula for the value of a warrant. The equation I wrote simply that the expected return on a warrant should depend on the risk of the warrant in the same way that it does for a common stock. The final formula for a call option is: C0 = S0 N(d1) X e-rT N(d2) Equation : Black-Scholes Pricing Formula Where d1= d2 = d1 and C0 = current call option value. S0 = current stock price. N(d) = the probability that the random draw from a standard normal distribution will be less than d. X = exercised price. r = risk-free interest rate. T = time of expiration of option. = standard deviation of the annualized continuously compounded rate of return of the stock. 2.6.1 Assumptions of the Black-Scholes Model The assumptions of the Black-Scholes Model are: Constant volatility: the stock chosen should be stable in constant terms in the short run. Efficient markets: this model suggests that people cannot consistently predict the direction of the market or an individual stock. Sholes and Merton assume that the markets, prices have equal probability of going up or down. This is called Random Walk. No dividends: during the options life no coupons will be paid out. Interest Rates are known: like volatility, this model also assumes that the interest rate are constant throughout. Such an example can include the risk-free rates such as the rate on a government treasury bill. Log normally distributed returns: the returns are assumed to be normally distributed. European-style options: the model is only based on the European stocks which can only be exercised on the pre-determined date. No commissions and transaction costs: it is assumed there are no fees paid for buying and se lling options and stocks and no barriers to trading. Liquidity: markets are assumed to be perfectly liquid. Chapter 3 Prior Literature about the Use of Derivatives Derivatives generate reported earnings that are often wildly overstated and based on estimates whose inaccuracy may not be exposed for many years. Warren Buffet BBC News Buffett warns on investment time bomb https://news.bbc.co.uk/2/hi/business/2817995.stm 4 March, 2003 3.1 Regulatory Regime Concerning Credit Derivative Markets The market of derivatives has undergone rapid growth in the last decade. According to figures issued by the Bank of International Settlements (BIS) report (2009), Over-the-Counter contracts stand at a national amount of $605 trillion up to the end of June 2009, which is 10% more than the previous six month period. Notional contracts are defined as the amount of contractual deals which has not yet been settled up to the reporting date. The question of an adequate regulatory regime which supports for derivative markets comes to mind. Miller (1991) states that regulatory arbitrage enhanced the early activity in derivative markets. In 1992, the United States adopted the Futures Trading Practice Act which triggered growth in the global derivatives markets. This act enabled the derivative markets to be fostered with legal certainty and also allowed the Commodity Futures Trading Commission to issue OTC contracts from the Commodity Exchange Act. The existing regulatory regime is main ly based on self-regulatory initiatives as Ayadi and Behr (2009) explain that the latter could also be seen as market discipline as it seeks the standardisation of derivative transactions while at the same time accommodating the instruments inherent complexity. This was precisely recommended by the Basel Committee in the BIS report on Credit Risk Transfer (2005) where it is stated that All market participants need to continue paying careful attention to the legal documentation relating to credit derivatives, such as the range of credit events covered by the instruments and the clear and unambiguous identification of the underlying reference. Standardisation should also continue in a market where innovative financial instruments are mushrooming. Moreover, there is a need for market participants to encourage due diligence necessary to clearly identify their legal responsibilities to the counter party or customer. It is crucial to foster further transparency when marketing structure d and complex CRT products. Organisers and dealers should foster a complete understanding of the nature and material terms, conditions and risks involved and should not solely rely on external ratings as a measure of risk associated with the transaction. Before entering in a CRT transaction, investors should ensure their capacity both on the outset and on an on-going basis to obtain the necessary information to properly evaluate and manage the risks associated with their investment. Information on the risk profile of the investment should be accessible to them on a continuous basis. However, it is quite easy to write factors which are aimed at a hybrid regulatory regime but the recent financial crises has led to market disturbances which led to reduced liquidity and ultimately forcing central banks to act as lenders of last resort. This was proven by Elsinger (2008) who stated that JP Morgans invention of credit derivatives brought about a $58 trillion elephant in the room which she believes was the main cause of the autumn wreckage on Wall Street. Derivatives are still essential in the financial system as long as there is the implementation of effective self-regulatory regimes together with strict supervision in order to prevent harmful misusing which would ultimately destruct not only the liquid position of the institution but the universal financial system. 3.2 Use of Derivatives in Foreign Countries The use of derivatives can vary from either speculative purposes which aim for profit maximisation or else for hedging. The aim for the use of derivatives differs according to the nature of the firm as well as the size of the country. 3.2.1 Use of Derivatives by Foreign Non-Financial Companies The usage of derivatives plays an important role for non-financial firms. In a study conducted by Guay (2002), it is reported that non-financial firms also make use of derivatives due to the fact that firms also face currency, interest rate and commodity price fluctuations. Though, Guay (2002) also reported that the derivative position held by these firms is relatively small when compared to their overall risk exposure. Guay (2002) also argues that non-financial entities use derivatives only when the benefits exceed the costs, and thus are not used for the primary cause of hedging. Studies such as Judge (2002) investigated various aspects surrounding the use of derivatives by non-financial companies in United Kingdom. The information for this study was collected from the FT UK500, whic includes the largest 500 companies in the United Kingdom. The latter reported that 67% of non-financial businesses have derivative contracts listed on their annual reports whilst 78% responded a y es to the use of derivatives. When comparing these results to United States firms, many studies such as Phillips (1995), Gay and Nam (1998) and Howton and Perfect (1998) all report that more than 60% of non-financial firms in the United States use derivatives. An important point stated by Kedia and Mozumdar (2002), is that hedging practices by United States companies are mainly associated with foreign currency debt. This puts forward the idea that firms make use of strategies to manage risk which can include both on-balance sheet financial and operational policies as well as hedging based on derivatives. Thus as Judge (2002), explains if a company is stating that it does not make any use of derivative contracts it can imply that the firm has managed its exposure through an on-balance sheet method and thus the effect is netted. A paper issued by Brunzell et al (2009), reports that Nordic countries, mainly Denmark, Finland, Iceland and Sweden, potentially have smaller reasons to hedge interest rate risk and exchange rate risk due to their size. Though, the paper reported a 61.6%, which represents the use of derivatives of these Nordic countries, which is ultimately stands in equilibrium to the usage by the larger countries mentioned earlier. 3.2.2 Use of Derivatives by Foreign Financial Companies Commercial banks are said to enter into derivative contracts in order to hedge thier position. The extent of speculation is more difficult to determine becuase specualtive-type risks may arise from certain dealer activities which may not be reported. Financial companies make up the foundation of the OTC derivative market. This is becuase their derivative desk caters to customers, trading between one another to elimiante risks as well as to be innovative by developing new instruments. As mentioned earlier, the introduction of credit derivatives in the late 1990s brought about a new dimensions in portfolio credit assessment. The principle use of credit derivatives, as noted by Minton et al (2006), is that it enables banks to manage efficiently the credit risk portfolio. This is because they can use these contracts to transfer a part or all of the credit risk to another party. During a speech, Greenspan (2004) stated that The new instruments of risk dispersion have enabled th e largest and most sophisticated banks in their credit-granting role to divest themselves of much credit risk by passing it to institutions with far less leverage. The figures issued by the BIS, mentioned earlier, show that the market of derivatives has experienced a dramatic growth over the past years. This is also in line with what the Comptroller of the Currency Administrator of National Banks report which states that large countries such as the United States hold $203.5 trillion notional amount of derivatives in the second quarter of 2009. This report also proclaims that the largest sector of credit derivatives is in the credit default swap which represents 98%. Wharmby (2005) reports that the United Kingdom has an average daily turnover of $580 billion in OTC derivatives whilst Mallin et al (2001) reports that the United Kingdom is exposed to approximately 60%. 3.3 Conclusion Derivatives are the widest financial innovation of the last thirty years. As seen forwards, futures, options and also swaps can be used by anyone who is interested to hedge risk. With the help of the Black-Scholes Pricing Model investors can price options easily. Though they seem easy to conduct; they are actually complex to maintain. This is why in the following chapters we will be comparing the results obtained from local banks and non-financial companies with what the literature has provided about the amount and the main reasons behind the use of derivatives.

Review Of The Of The Flies Essay - 1828 Words

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The review begins with a brief overview of geopolymers and examines the extant literature on the mechanical behavior of geopolymers after exposing to high temperatures by artificial intelligent techniques. The final and compressive strength of geopolymers is also discussed. Finally, this review examines studies on genetic programming as a technique of modelingRead MoreLord of the Flies by William Golding932 Words   |  4 Pages For this essay, I will be discussing two particular themes from a novel called Lord of the Flies by William Golding. Lord of the Flies was written in 1954 after World War II. Ruler of the Flies is a purposeful anecdote about something that many readers can’t really describe. Individuals cant choose precisely what. Its either about the inalienable underhanded of man, or mental battle, or religion, or personal inclination, or the creators emotions on war; however William Golding was in the Navy

Bertolt Brecht free essay sample

Art is not a mirror held up to reality but a hammer with which to shape it. Bertolt Brecht. Bertolt Brecht is one of the most influential theatre practitioners of the last century. Brecht believed that the theatres purpose was to educate. Brecht wanted to evoke critical attitudes in his audiences; he introduced theatrical devices that were designed to challenge the audiences unthinking emotional involvement with productions. Brecht was strongly influenced by the political and cultural ideals associated with Marxism.The social and artistic goals inspiring Brecht’s theatrical styles were also addressed and articulated in Brechts early propagandistic plays ‘The Threepenny Opera’ and ‘Mother Courage and her Children’. Brechts Marxist political convictions led him to propose an alternative direction for the theatre combining the meaning of instruction and entertainment. In this way the theatre could project a picture of the world by artistic means and offer models of life that could help the audiences understand their social environment both rationally and emotionally. We will write a custom essay sample on Bertolt Brecht or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Brechts emphasis on the political and didactic significance of theatre inspired him to try and alert audiences for the need of social change. This introduced ‘Epic Theatre’ generally described as Brechts theory and techniques of dramatic action that was episodic. Epic Theatre presents a sequence of incidents or events that are narrated on a grand scale without the restrictions of time, place or formal plot. It consisted of non-representational staging, alienation and the incorporation of theatricalism.All elements contributed to Brechts overall purpose that was to comment on the political, social and economic elements that affected the lives of his characters. The aim was to develop a consciousness within the audience that would then create a catalyst act. ‘The Threepenny Opera’ captivates many elements of epic theatre. First staged in 1928, it is based on John Gay’s eightieth century ‘Beggars Opera. ’ ‘The Threepenny Opera’ is a dry, humorous and biting satire of decayed capitalism.From Marxism, Brecht took a revolutionary stance-not only towards the class struggle but also towards the representation of bourgeois realism on stage. Brecht argued that Realistic theatre presented and reinforced a particular political vision, a view of society as the inevitable product of evolution and history. ‘The Threepenny Opera’ clearly outlined Brecht’s revolutionary intentions, this is evident in the ‘First Threepenny Finale: The Uncertainty of Human Circumstances. ’-â€Å"We all would practice charity and love: To give the poor our money, must be right.When Man is good, Gods kingdoms not far off; ? Who wouldnt like to bask in Heavens light? We all would practice charity and love. † For Brecht, the realism of the time, which was based on bourgeois ideals and characters, was a biased representation of social reality. Brecht reinterpreted Marxs concept of alienations a theatrical ideology, in order to displace realism and to show up the hidden agenda of the theatre of the time. The Verfremdungseffekt, alienation effect, is the primary innovation of Brechts epic theater. Brecht uses alienation to describe the method of helping the audience to be receptive to his dramatic intentions. Brecht called for the audience’s alienation to oppose the mystifying tendency of the conventional stage, tendencies that reduced its audience to passive, trance-like states. Some alienation techniques include making the mechanics of scene changes visible, inserting songs in the middle of scenes to interrupt the action and finding ways for actors to physically ‘show their characters relationships to their circumstances.Composed by Brecht in 1939. ‘Mother Courage’s’ message was; War is hell. Ostensibly about the Thirty Years’ War, between the Protestants and the Catholics during the 17th Century, the play was written as a response to World War I and the rise of Nazi Germany. Historicization was achieved by using events from the past to create parallels to contemporary issues. ‘Mother Courage’ encouraged the audience to expand their outlook and experience of the play about the bigger issues of war and its effects on culture, community individuals universally.The success of each scene in Mother Courage hinges upon alienation devices. For example, Courages Song of the Great Capitulation, when played without alienation, risks seducing the spectator with the pleasures of surrender rather than exposing the depravity in the submission to an unjust authority. The term gesture or grandgestes as used by Brecht, referred to everything an actor did in terms of gesture, stance, body language, facial expressions and intonations in order to show the significance of a scene. Enforcing epic theatre and creating an attitude towards performance, which contrast with aturalism. In ‘The Threepenny Opera’, actors regularly relinquished their roles and address the audience directly breaking the fourth wall and shocking the audience out of their comfor table lull and confronting them with direct dialogue. â€Å"†¦. † Scene nine. Audiences are therefore encouraged to engage to the presentation. When our group experimented with the play ‘Mother Courage,’ we incorporated gestures into the scenes through the manipulation of Mother Courage’s appearance we revealed a significant example of Brechts use of gestures.Represented by the character of Mother Courage showing her â€Å"inner emotional turmoil† not only through her dialogue but also through her physical appearance and actions. We included gestures of miming, this was effective as it subverted reality and emphasizing the fact our audience was indeed in the theatre. In keeping with the egalitarian ideals associated with Marxism, Brechts productions were often very collaborative.Collaborating with the composers Kurt Weill and Paul Dessau to include music as a vital ingredient of his productions. The purpose of song was to show lighter sides to deeply serious situations it ultimately alienates the audience and makes them question the social realities that were being presented. Music was evident in both ‘Threepenny’ and ‘Mother Courage’ Brechts incisive lyrics and Kurt Weills atonal melodies continue to be used today by musicians such as Elvis Costello and Sting.Brechts theories and practices have had a major impact on contemporary theatre. His view of theatre as an educational tool for social change, his collaborative approaches, and his theories of epic theatre are only some of his many contributions to the development of theatre. Brecht’s intentions and styles and techniques continue today throughout theatre and the move industry. The settings and costumes of his productions are the features that have most influenced the contemporary theatre.Contemporary design exhibits in many ways the influences of his staging and dramatic techniques. Brecht believed that theaters purpose was to educate, I believed that this was achieved in many ways. He has been inspirational through the last century and still continues today influencing theaters around the world and the continuation of his dramatic styles and techniques will never faid. In the dark times. Will there also be singing? Yes, there will also be singing. About the dark times. Bertolt Brecht

Social Learning Theory and juvenile delinquency

Introduction The purpose of this essay is to examine the empirical studies of the Social Learning Theory on juvenile delinquency. Juvenile delinquency entails the term that is used to explain to young people who have not attained majority age and are involved in committing crimes. Delinquency refers to the failure to follow laws that are set by the state.Advertising We will write a custom research paper sample on Social Learning Theory and juvenile delinquency specifically for you for only $16.05 $11/page Learn More According to the sociological aspect of criminology, social interactions and individualism are the factors behind the juvenile delinquency. Usually, society does not exist as an island but rather different person interacts and this ensures that the society continues to exist. The social interaction theory and juvenile delinquency have been written extensively over the years and the studies have proved to be logically consistent and also usefu l in providing the empirical support. Thus, the studies play an important role of explaining all the social behaviors without which it is impossible to explain the causes of juvenile delinquency. The empirical studies of the Social Learning Theory on juvenile delinquency helps to provide an insight on the past, present as well as the future of criminology i.e. the study sheds light on the future directions of social interaction theory. The main aim of social interaction theories on juvenile delinquency is to explain how such social influences as religion, family and politics shapes a person over time. The social interaction theories on juvenile delinquency assume that interplay exists between an individual, the environment and delinquent acts. Explanatory concepts of social interaction theories on juvenile delinquency The social interaction theory on juvenile delinquency is comprised of four main explanatory concepts i.e. the differential association theory, definitions theory, imit ation theory and differential reinforcement theory. Differentiation association theory is a social interaction theory that was formulated by Edwin Sutherland. According to this theory, people develops deviant behaviors by interacting and associating themselves with those who engages themselves in deviant behavior i.e. one can learn positive or negative behavior through interaction. Sutherland in his Differentiation Association Theory argued that juvenile delinquency is caused by observation and social interaction. According to this theory one is deemed to act in a deviant manner as a result of association with group members who favor juvenile delinquency than those members who value the societal norms. This theory, also argues that the familiy unit is the major source of learning behaviors.Thus,if ones’ familiy unit is made up of people who are engaged in deviant behaviors, then one is bound to develop the same kind of behaviors.Advertising Looking for research paper on criminal law? Let's see if we can help you! Get your first paper with 15% OFF Learn More Also,the theory argues that one learns certain norms and behaviors through the internet, mass media e.t.c. formulating the differential association theory, Sutherland used three concepts i.e. the culture conflict, cultural transmission theory and the ecological transmission theory. The culture conflict concept explains the presence of many crimes in the society and also the progress towards becoming a criminal. Sutherland’s theory is thus important as it helps to explain the juvenile delinquency in the society (Morrison, 1995, P.51). Definitions theory was developed by Aker and it refers to a person’s orientations, explanations, justifications e.t.c. that explains as to whether morally right or incorrect. Definitions theory of juvenile delinquency is thus the process whereby one evaluates the rightfulness or wrongness of a particular action. According to this theory. The l aw definitions may be specific or general i.e. a person may obey law generally and in turn violate specific provisions of the law. Definitions are comprised of behaviors that are learned as a result of interactions and other societal norms that conforms the delinquent acts. Specific definitions render one to act in a certain manner and the more one learns specific or general attitudes, the higher the chances of engaging in delinquency acts (Krohn et.al. 2009, P.104). Imitations theory of juvenile delinquency refers to the process whereby one imitates behavioral characteristics of others by observing them. The imitation theory of social delinquency was modeled by Gabriel Tarde who a French criminologist.Tarde was held the view that the regional differences that exists in crime rates are as a result of local variations i.e. alcoholism and poverty and not as a result of biological factors. Tarde also argued that juvenile delinquency is a lifestyle that is learned through social interac tion.Tarde in his imitation laws argued that juvenile delinquency is a function of interacting with people who have deviant behaviors. With this regards, a criminal undergoes through phases of apprenticeship which is similar to that of a lawyer or a doctor. Tarde came up with three laws that provided an account for the imitations and juvenile delinquency. The first imitations’ law holds that people tends to imitate others when they are near one another. Thus, imitation is eminent in most cities and towns that are densely populated. The second imitation law holds that those people who are inferiors tend to imitate their superiors. With this regards, juvenile delinquency originates from the superiors and later on, descends to lower ranks.Advertising We will write a custom research paper sample on Social Learning Theory and juvenile delinquency specifically for you for only $16.05 $11/page Learn More The third imitation law by Tarde holds that, it i s possible to substitute fashions particularly when the two arises at the same time. The imitation theory of juvenile delinquency also held the view that crimes originates in the capital cities. For instance, carjacking, terrorist activities and other major crimes are prevalent in metropolitan cities as opposed to rural areas. Differential reinforcement theory of juvenile delinquency is concerned with the balance that exists between the punishments and rewards that occurs following a particular behavior. This balance plays a vital role in enabling individuals to behave in a particular manner.Thus,the more the rewards for juvenile delinquency, the higher the tendency to commit a crime and vice versa. Reinforcements and punishments can be nonsocial e.g. the direct consequences of alcoholism and drugs abuse. Causal factors of juvenile delinquency The youths use the social interactions among themselves as a means to commit crimes. The social interactions are a concern among many parents as they fear that their children may associate themselves in bad company and in turn commit delinquent acts. The social interaction among the deviant youths acts as a means through which the youths influence each other. The social learning theories that are presented by Akers, Sutherland and Marza explain that juvenile delinquencies occur in causal terms. The causal aspects of juvenile delinquency include the individual differences, social structures, cultural factors and social psychological (Burfeind, Bartusch, 2006, P.66).The individual differences includes the psychological and biological factors. Various studies of the social interaction theory on juvenile delinquency reveal that the familiy interaction plays an important role of promoting behaviors among young children. High strictness and low support contributes to juvenile delinquencies i.e. they causes an increase in post-punishment of the acts that were previously forbidden. Personality is interrelated with one’s susceptibility to reward or punishment and therefore, the extraverts are usually less likely to acquire deviant behaviors. On the other hand, strong conditioning has the effect of causing inhibition of criminal behaviors particularly in environments that encourage juvenile delinquency.Thus,the success of social responsibility and socialized depends is largely dependent on ones’ conditionality. The studies have also considered IQ among offenders be the main reason behind juvenile delinquency (Kim, 2008, P.23). The social factors of juvenile delinquency include the inequalities and opportunities. Poverty and inequality has the effect of frustrating young people and in-turn causing them to engage in criminal activities. This is due to the fact that, they usually feel that inequality exist between what other people have and what the youth believe they ought to have. According to social control theory, delinquency arises when the social bonds are broken.Advertising Looking for research paper on criminal law? Let's see if we can help you! Get your first paper with 15% OFF Learn More Travis Hirsch in his analysis came up with four elements of social bonds of an individual i.e. attachment, commitment, involvement and belief. Attachment is made of such aspects as sensitivity and affection for others. According to Travis, commitment included such acts as investing in conventional societies. Involvement entails spending a considerable amount of time on conventional duties whereas the belief is the extent upon which the youths feel they should abide by the laws. According to Hirsch’s ,one is less likely to engage in criminal activities if he or she is strongly attached to the teachers or parents.Also,a child who has dedicated his or her effort and time in schools’ conventional activity is likely to conform and rarely engages in delinquent acts. However,Hirschi used empirical data that was obtained from the adolescents self reports in testing his analysis of juvenile delinquency and this made his work to be considered as unique.Aker also noted that Hirsc h’s’ work was unusual as far as juvenile delinquency is concerned (Sutherland et.al.1992,P.71). The cultural factors that have been considered as risk factors with regards to juvenile delinquency include such aspects as societal norms that promote violence in resolving disputes. Studies that demonstrated the risky factors that cause juvenile delinquency were first conducted in the early 20th century. The research was first done in the analysis by Breckinridge and Abbott in 1922 and later in the analysis by Healy in 1915.However, the research findings by Breckinridge, Abbott and Healy are newly repeated in the analysis by Loeber and Farrington in 1998.Healy in his study argued that juvenile delinquencies begins at childhood i.e. all confirmed delinquents starts their careers in their early years. Healy also noted that the repeated offenders have the greatest impact in the society as a result of their offending frequencies. Healy emphasized on the importance of beginning the treatment at an early period.Afterwards, Loeber and Farrington in their studies argued that juvenile delinquency arises through the interaction of the following factors i.e. individual, contextual, and situational as well as the community factor. They also pointed out that serious juvenile offenders starts to display their juvenile delinquency at childhood and thus there is need for early intervention.However, Loeber and Farrington in their studies contended that the juvenile offenders poses a greater challenge with regards to the juvenile justice policies due to the fact that they are responsible for virtually all the criminal activities in the society (Rosenheim, 2002, P.201-203). Juvenile delinquency and time With regards to the studies of social learning theory on juvenile delinquency history, there is a pattern that is revealed.Thus, the old studies of social learning theory on juvenile delinquency are usually discarded and they are deemed to be inadequate and outdated. Mu ch emphasis is given to new studies due to the reason that crime as well as juvenile delinquency are keep on changing with time.However, this concept is rarely studied systematically and the empirical studies of the social learning theory on juvenile delinquency have suggested that juvenile delinquency does not change with time. Primarily, juvenile delinquency involves property crimes rather than violence and its exhibited by males. Such activities usually start at a very early age and fully peaks at teenage. The delinquent acts are more common in children from poor background and in major cities and towns. As far as many young people engage in juvenile delinquency, only a few of them commits serious offenses regularly. This implies that juvenile delinquency have remained the same over the years (Bruce et.al. 2000, P.422). However, the conceptions regarding juvenile delinquency have greatly changes over the years even though the extent and nature of delinquent behaviors have remaine d them same. The reasons behind juvenile delinquency have largely been attributed the broken social bonds. However, the manner in which the theorists and researchers interpret data concerning the social learning theory on juvenile delinquency has changed (Bruce, et.al. 2000, P.33). Conclusion An empirical study of the social learning theory on juvenile delinquency reveals that several patterns have emerged over the past few years. The conceptions concerning juvenile delinquency have changed in that the past decade has seen criminals using guns in carrying out their criminal activities. There have been changes too regarding the reasons behind juvenile delinquency. The biological aspects such as IQ have however been considered as the main reason behind juvenile delinquency. The empirical study of the social learning theory on juvenile delinquency has found out that delinquent behaviors are strongly linked with family variables. The empirical studies revealed that delinquent behaviors begin at childhood but they have failed to explain the adult outcomes among the offenders. Reference List Bruce, D et.al. (2000). Juvenile delinquency: historical, cultural, and legal  Perspectives. Amststerdam: Elsevier. Burfeind, J. Bartusch, J. (2006). Juvenile delinquency: an integrated  Approach. London: Jones Bartlett Learning. Kim, H. (2008). Juvenile delinquency and youth crime.Hauppauge: Nova Publishers. Krohn, M. et al. (2009). Handbook on Crime and Deviance. Berlin: Springer. Morrison, W. (1995).Theoretical Criminology.London: Routledge. Rosenheim, M. (2002). A century of juvenile justice. Chicago: University of Chicago Press. Sutherland, E.et.al. (1992). Principles of Criminology. Maryland: Rowman Littlefield. 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