Once established, the standardisation of the terms of the contract
enabled contracts to be readily traded as what we call today ‘futures
contracts’. Thus the forerunner of today’s markets was born and
farmers or merchants who wanted to hedge against price fluctu-
ations, caused by poor or bumper harvests, bought and sold futures
contracts with traders or market makers who were willing to make a
different price for buying and selling. Speculators, who wanted to
gamble on the price going up or down without actually buying or
selling the physical grains themselves, were also attracted to the
market. Therefore liquidity in the contracts was created, as many
buyers and sellers came together to trade. The trader was able, if
they wanted, to lay off the risk they had assumed from buying and
selling with the hedgers, by doing the opposite, that is buying and
selling with the speculators. The trader’s profit was the difference
between buying and selling the contracts.
Another important result of the creation of the CBOT was the ability
to discover the price of a commodity. As buyers and sellers joined
together on the floor of the exchange to trade and quoted prices to
each other, the ‘real’ price for, say, soybeans was established. Price
discovery helps to create a stability in price because anyone, buyer or
seller, can immediately see by looking at the futures price what price
the supply and demand for the underlying is generating.
In essence, today’s markets do the same job as the original concept
back in 1848 but in hundreds of different products. The CBOT, for
instance, trades a wide range of contracts on commodities, like soy-
beans and silver as well as financials like Treasury Bonds and Notes.
In 1874, following in CBOT’s footsteps, the Chicago Produce
Exchange provided the market for perishable agricultural products
like butter and eggs. After some upheaval in 1898, certain traders
broke away and formed what is now known as the Chicago Mercan-
tile Exchange (CME). In 1919 the CME was recognised to allow
futures trading. Futures on a variety of commodities have since come
to the exchange, including pork bellies, hogs and cattle as well as
financials like currencies and index products.
The emergence of financial futures and options markets
In 1972 the CME established a division known as the International
Monetary Market (IMM). Its purpose was to enable trading in futures
contracts based on foreign currencies. In 1982 the CME started
trading futures contracts on the S&P 500 Stock Index and now
trades many different index products.
Development of futures, options and OTC derivatives 3
In the United States, prior to 1975, nearly all contracts traded were
agricultural. Volume in these contracts was less than 10 million per
year. However, by 1994 the figure had risen to almost 700 million
contracts and by the end of 2003 to a staggering 8.1 billion contracts.
From the end of Second World War until the early 1970s there was
a very stable economic environment in the United States helped by
the Bretton Woods Agreement, which kept interest rates in a narrow
range. However, when the US dollar was devalued, partly as a con-
sequence of the funding of the Vietnam War and a heavy domestic
spending programme, uncertainty and fluctuation in interest rates
replaced the economic stability. Europe and Japan had also recovered
in economic terms from the re-building effects of Second World War
and, with their economies growing, the Dollar came under severe
pressure. The need to be able to hedge (or to protect) against the risk
associated with volatile currencies and interest rates became critical
for many businesses and industries. The result was the birth of the
first financial contracts, which became the cornerstone of the futures
and options industry, as we know it today.
It was in 1975 that the CBOT launched the first futures contract
on a financial instrument, the Ginnie Mae Mortgage Bond future,
followed by the CME, which listed a Eurodollar contract. Shortly, the
CBOT listed what was to become one of the world’s most heavily
traded futures contract, the Treasury Bond future.
Since then, the growth in volume of futures and options contracts
in the United States and the rest of the world has been quite phe-
nomenal, as more and more exchanges have opened and a plethora
of financial products were developed and listed to meet the demand
for risk-hedging mechanisms.
This process continues today as new markets open in the devel-
oping countries. However, the emergence of futures and options
markets outside the United States has seen a change in the make-up
of the overall volume of business traded. Today Eurex, formed from
the amalgamation of the German Deutsche Terminborse and the
Swiss Options and Financial Futures Exchange, is one of the largest
exchanges in the world by volume of contracts traded. The Euro
Bund future traded on Eurex is one of the heaviest traded futures
contracts in the world and, to illustrate the global nature of today’s
market, the Kospi option traded on the Korea Stock Exchange was in
2003 the heaviest traded derivatives contract in the world (Table 1.1).
Mergers and alliances between derivative markets and stock
exchanges has been common in recent times and today we have
Euronext, the combined stock and derivative markets of France,
4 Clearing and settlement of derivatives
Development of futures, options and OTC derivatives 5
Table 1.1 Global futures and options volume.
2003 2002 Exchange 2002 2003 % Change
Rank Rank Volume Volume
1 1 Korea Stock 1,932,749,868 2,899,937,895 50.04
Exchange
2 2 Eurex 801,200,873 1,014,932,312 26.68
3 3 Euronext 696,323,560 694,970,981 0.19
4 4 Chicago Mercantile 558,447,820 640,209,634 14.64
Exchange
5 5 Chicago Board of 343,882,529 454,190,749 32.08
Trade
6 6 Chicago Board Options 267,616,496 283,946,495 6.10
Exchange
7 8 International Securities 152,399,279 244,968,190 60.74
Exchange
8 7 American Stock 186,039,445 180,074,778 3.21
Exchange
9 11 Bovespa 90,884,897 177,223,140 95.00
10 14 Mexican Derivatives 84,274,979 173,820,944 106.25
Exchange
11 9 New York Mercantile 133,744,435 137,225,439 2.60
Exchange
12 10 BM&F 101,615,788 120,785,602 18.86
13 12 Philadelphia Stock 88,955,247 112,705,597 26.70
Exchange
14 15 Tokyo Commodity 75,413,190 87,252,219 15.70
Exchange
15 13 Pacific Exchange 85,426,649 86,152,637 0.85
16 18 Dalian Commodity 48,407,404 74,973,493 54.88
Exchange
17 17 London Metal 58,634,004 72,308,327 23.32
Exchange
18 16 OM 60,920,817 72,137,347 18.41
19 21 Sydney Futures 36,243,524 44,755,340 23.49
Exchange
20 33 National Stock 13,287,113 43,081,968 224.24
Exchange of India
21 34 Shanghai Futures 12,173,083 40,079,750 229.25
Exchange
22 19 Tel-Aviv Stock 41,419,705 38,098,479 8.02
Exchange
23 22 Singapore Exchange 32,887,395 35,648,224 8.39
Source: Futures Industry Association.
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