Derivatives are certainly not a contemporary invention. They have been known and utilised since ancient times. The first organised commodity exchange came into existence in Japan in the early 1700s.
The first formal commodities exchange, the Chicago Board of Trade (CBOT), was established in 1848 in the US to address the issue of ‘credit risk’ and to provide a centralised location for negotiating forward contracts.
From ‘forward’ trading in commodities, the commodity ‘futures’ emerged. The first futures type contract was titled ‘to arrive at’. Trading in futures on the CBOT began in the 1860s. In 1865, CBOT listed the first ‘exchange-traded’ derivatives contracts, known as futures contracts.
Futures trading developed out of the need for hedging the price risk involved in many commercial operations.
The Chicago Mercantile Exchange (CME), a spin-off of CBOT, was formed in 1919. However, it existed earlier in 1874 under the names of ‘Chicago Produce Exchange’ and ‘Chicago Butter and Egg Board’. The first financial futures to emerge were currency futures in the US in 1972.
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 included the British pound, the Canadian dollar, the Japanese yen, the Swiss franc, the German mark, the Australian dollar, and the euro dollar.
Currency futures were soon followed by interest rate futures. Interest rate futures contracts 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 the Kansas City Board of Trade on February 24, 1982. The market for futures and options grew rapidly in the 1980s and 1990s.
The collapse of the Bretton Woods regime of fixed parities and the introduction of floating rates for currencies in international financial markets paved the way for developing numerous financial derivatives. These derivatives served as effective risk management tools to cope with market uncertainties.