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  • Print publication year: 2008
  • Online publication date: June 2012

3 - The futures market

Summary

Forwards become futures (a bit of history)

Forward contracts were known, apparently, to the Ancient Greeks. But the modern development of this market began in the 1840s, in Chicago. The early settlers in the American Mid West were farmers and they needed a market for their produce. Initially, scarcities and then surpluses of livestock, corn, wheat, animal feed and the like caused huge and chaotic swings in prices. There was a need for a market to regulate and stabilise sales in all such products. Chicago, at the base of the Great Lakes and close to the farmlands of the Mid West, was a natural centre for transportation and distribution. In 1848, the Chicago Board of Trade (CBOT) was formed and the first forward contract (on corn) was written in March 1851.

It soon became apparent that an existing forward contract could, with a favourable movement of the market, become a thing of value. A forward contract could be sold, or bought, to generate a profit. Thus the idea of buying and selling forward contracts, purely for profit, was born. In 1865 a system for trading forward contracts was set up. This we shall describe shortly. These new, tradable contracts were called futures contracts and in time the futures markets would develop into new areas and far outstrip their agricultural beginnings.

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