History of Derivatives Market

Derivatives are definitely not a modern invention. They were known and were used from ancient times. The first organized commodity exchange came into existence in the early 1700s in Japan.

The first formal commodities exchange, the Chicago Board of Trade (CBOT), was formed in 1848 in the US to deal with the problem of ‘credit risk’ and to provide a centralized location to negotiate forward contracts.

From ‘forward’ trading in commodities emerged the commodity ‘futures.’ The first futures type contract was called ‘to arrive at.’ Trading in futures began on the CBOT in the 1860s. In 1865, CBOT listed the first ‘exchange-traded’ derivatives contracts, known as the futures contracts.

Futures trading grew out of the need for hedging the price risk involved in many commercial operations.

The Chicago Mercantile Exchange (CME), a spin-off of CBOT, was formed in 1919 though it did exist before in 1874 under the names of ‘Chicago Produce Exchange’ and ‘Chicago Butter and Egg Board.’ The first financial futures to emerge were the currency futures in 1972 in the US.

The first foreign currency futures contracts were traded on May 16, 1972, on the International Monetary Market (IMM), a CME division. The currency futures traded on the IMM were the British pound, the Canadian dollar, the Japanese yen, the Swiss franc, the German mark, the Australian dollar, and the euro-dollar.

Currency futures were followed soon by interest rate futures. Interest rate futures contracts were traded for the first time on the CBOT on October 20, 1975. Stock Index futures and options emerged in 1982.

The first stock index futures contracts were traded on Kansas City Board of Trade on February 24, 1982. The market for futures and options grew at a rapid pace in the 1980s and 1990s.

The collapse of the Bretton Woods regime of fixed parities and the introduction of floating rates for currencies in the international financial markets paved the way for developing a number of financial derivatives, which served as effective risk management tools to cope with market uncertainties.

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