Futures are a financial derivative obliging the seller to provide an asset to the buyer on an agreed date. They are traded for commodities and financial instruments. Futures trading has a long history, with the first known contract recorded in ancient Greece. Exchanges play a vital role in standardizing contracts, but futures trading carries significant risks. The Commodity Futures Trading Commission regulates futures transactions in the US.
Futures are a financial derivative known as a forward contract. A futures contract obliges the seller to provide a commodity or other asset to the buyer on the agreed date. They are widely traded for commodities such as sugar, coffee, oil, and wheat, as well as financial instruments such as stock indices, government bonds, and foreign currencies.
Aristotle records the first known futures contract in history to Thales, an ancient Greek philosopher. Believing that the upcoming olive harvest would be especially bountiful, Thales entered into agreements with the owners of all the olive oil presses in the region. In exchange for a small deposit months before the harvest, Thales obtained the right to lease the presses at market rates during the harvest. As it turned out, Thales was right about the crop, the demand for oil presses skyrocketed, and he made a lot of money.
By the 12th century, futures contracts had become a staple of European trade fairs. At that time, traveling with large amounts of merchandise was time consuming and dangerous. Instead, fair sellers traveled with display samples and sold futures for larger quantities for delivery at a later date. By the 17th century, these contracts were common enough that widespread speculation in them led to the Dutch Tulip Mania, in which prices for tulip bulbs became exorbitant. Most of the money exchange during the mania was, in fact, for tulip futures, not the tulips themselves. In Japan, the first recorded rice futures date back to the 17th century in Osaka. These offered the rice seller some protection against bad weather or acts of war. In the United States, the Chicago Board of Trade opened the first futures market in 1868, with contracts for wheat, pork belly, and copper.
By the early 1970s, trading in futures and other derivatives had exploded in volume. Pricing models developed by Fischer Black and Myron Scholes allowed investors and speculators to quickly price futures and options on them. To meet the demand for new types, major exchanges expanded or opened around the world, primarily in Chicago, New York, and London.
Exchanges play a vital role in futures trading. Each contract is characterized by a number of factors, including the nature of the underlying asset, when it must be delivered, the currency of the transaction, when the contract goes delisted, and the size of the mark, or minimum legal change in price. . By standardizing these factors across a wide range of futures contracts, exchanges create a large and predictable market.
Futures trading is not without significant risks. Because these contracts typically involve high levels of leverage, they have been at the center of many market explosions. Nick Leeson and Barings Bank, Enron and Metallgesellshaft are just a few of the infamous names associated with future-driven financial disasters. The most famous of all may be long-term capital management (LTCM); Despite having both Fischer Black and Myron Scholes on its payroll, both Nobel laureates, LTCM managed to lose so much money so quickly that the United States Federal Reserve Bank was forced to step in and stage a bailout to prevent a complete financial collapse. system.
In the United States, these transactions are regulated by the Commodity Futures Trading Commission.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
