History of derivative Trading

Forward delivery contracts, stating what is to be delivered for a fixed price at a specified place on a specified date, existed in ancient Greece and Rome. Roman emperors entered forward contracts to provide the masses with their supply of Egyptian grain. These contracts were also undertaken between farmers and merchants to eliminate the risk arising out of uncertain future prices of grains. Thus, forward contracts have existed for centuries for hedging price risk.

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 centralized location to negotiate forward contracts. From forward trading in commodities emerged the commodity 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 off the need for hedging the price risk involved in many commercial operations. The Chicago Mercantile Exchange (CME), a spin off of CBOT was a 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 merge 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 division of CME. The currency futures traded on the IMM are the British pound, the Canadian dollar, the Japanese yen, the Swiss franc, the German mark, the Australian dollar, and the Eurodollar. Currency futures were followed soon by interest rate futures. Interest rate futures contract 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 first of the several networks, which offered a trading link between two exchanges, was formed between the Singapore International Monetary Exchange (SIMEX) and the CME on September 7, 1984.

Options are as old as futures. Their history also dates back to ancient Greece and Rome. The first account of options and its creator, Thales, was published in Aristotle’s Politics; in 332 BC. Thales used a small amount of money to secure the right to use olive presses during harvest season. During olive picking time, he sold his options for a great deal more than he paid for them.

Options were very popular with speculators in the tulip craze of seventeenth century Holland, Tulips the brightly colored flowers, were symbol of affluence; owing to a high demand, tulip bulb prices shot up. Dutch growers and dealers traded in tulip bulb options. There was so much speculation that people even mortgaged their homes and businesses. These speculators were wiped out when the tulip craze collapsed in 1637 as there was no mechanism to guarantee the performance of the option terms.

The first call and put options were invented by an American financier, Russel Sage, in 1872. These options were traded over the counter. Agricultural commodities options were traded in the nineteenth century in England and the US. Options on shares were available in the US on the Over-the-Counter (OTC) market only until 1973 without much knowledge of valuation. A group of firms known as Put and Call Brokers and Dealers’ Association was set up in early 1900s to provide a mechanism for bringing buyers and sellers together.

Some interesting historical Dates:
The Ancient Derivatives>

1400s – Japanese rice futures
1600s – Dutch tulip bulb options
1800s – Puts and options

The Recent: Financial Derivatives Listed Markets:

1972 – Financial currency futures
1973 – Stock options
1977 – Treasury bond futures
1981 – Eurodollar futures
1982 – Index futures
1983 – Stock index options
1990 – Foreign index warrants and leaps
1991 – Swap futures
1992 – Insurance futures
1993 – Flex options

OTC Markets:
1981 – Currency swaps
1982 – Interest rate swaps
1983 – Currency and bond options
1987 – Equity derivatives markets
1988 – Hybrid derivatives