Futures are a name given to a financial derivative referred to as a forward contract. By a futures contract the seller is obliged to provide a commodity or other asset to the buyer at an agreed-upon date. For commodities such as sugar, coffee, oil and wheat futures are widely traded, along with these commodities they are also traded for financial instruments such as stock market indexes, government bonds and foreign currencies.
Earliest known futures contract
Aristotle has recorded the earliest known futures contract in the story of Thales, an ancient Greek philosopher. Thales presumed that the upcoming olive harvest would be especially bountiful, so he entered into agreements with the owners of all the olive oil presses in the region. Months ahead of the harvest in exchange for a small deposit, Thales obtained the right to lease the presses at market prices during the harvest. As the time reaches, Thales was correct about the harvest, there was a boom in the demand for oil presses, and he made a great deal of money.
Futures Contract in 12th century
Futures contracts had become a staple of European trade fairs by the 12th century. Traveling with large quantities of goods was time-consuming and dangerous at that time. Instead of that Fair vendors traveled with display samples and larger quantities of futures were sold by them to be delivered at a later date.
Futures Contract in 17th century
Futures contracts were common enough by the 17th century, that widespread speculation in them drove the Dutch Tulip Mania, in which prices for tulip bulbs became exorbitant. during the mania most money changing hands was, in fact, for futures on tulips, and not for tulips themselves.
First Futures Contract in Japan
When we talk about futures in Japan, then I may tell you that the first recorded rice futures date from 17th century Osaka. Some protection was offered by these futures to the rice seller from bad weather or acts of war.
First Future Market in USA
In the United States, the the first futures market was opened by Chicago Board of Trade in 1868, with contracts for wheat, pork bellies and copper.
By the early 1970s, there has been an explosion in volume of trading in futures and other derivatives. By the pricing models developed by Fischer Black and Myron Scholes investors and speculators were allowed to rapidly price futures and options on futures. Major exchanges expanded or opened across the globe to supply the demand for new types of futures, principally these were opened in Chicago, New York and London.
Role of Exchanges in Futures Trading
A vital role has been played by exchanges in futures trading.
Each futures contract is characterized by a number of factors, these factors include:
-
what is the time of its delivery,
-
what will be the currency of the transaction,
-
what is that point at which the contract stops trading, and
-
what is the tick size, or minimum legal change in price.
The exchanges create a large, predictable marketplace, by standardizing these factors across a wide range of futures contracts.
Risk in Futures Trading
Futures trading is also such trading that brings risk with it. Due to the reason that futures contracts generally entail high levels of leverage, they have been at the heart of many market blowups. Nick Leeson and Barings Bank, Enron and Metallgesellshaft are just a few of the infamous names that are associated with futures-driven financial disasters.
Long Term Capital Management (LTCM) may well be the most famous of all despite having both Fischer Black and Myron Scholes on their payroll, so much money has been lost by both Nobel Laureates, LTCM that the Federal Reserve Bank of the United States was obliged to intervene and arrange a bailout to prevent a meltdown of the entire financial system.
In the United States, the Commodity Futures Trading Commission regulates the futures transactions.
People who liked this Post also read
Posted by R. MAK. in Forex Facts · 0 Comment
