Chapter 1 Introduction
Brief History of Futures
In the 1840s, Chicago was becoming the mecca of the commercial
exchange with railroads and telegraph lines connecting through it. In 1848
the Chicago Board of Trade was formed which gave birth to the futures
contract. The very first futures contracts were created for commodities,
specifically agricultural commodities.
If you have ever read about futures the typical story-line about them is that
they were created to help farmers hedge against the price-fluctuations of the
crops that they produced. Futures can be a great way to hedge market-
specific risk and they can also be used for regular trading and speculation.
Futures are a leveraged product which can help traders reap huge profits,
but also carries significant risk.
The first futures contract that was ever traded was for corn. After that, it
was followed by wheat, soybeans, cotton, cocoa, orange juice, sugar, pork
cattle, and many others. Contracts for other products slowly began to
develop. By the 1970’s futures trading began to penetrate other markets.
THE FUTURES CONTRACT
A futures contract is an agreement, a legal agreement at that, to buy or sell a
specific instrument at a preset price at a specific time in the future. The
underlying asset for a futures contract could be stocks, commodities,
currencies, bonds and other instruments. The terms of a futures contract are
standardized in quantity and the delivery date. The exchanges facilitate
trading between buyers and sellers. In order to trade futures traders need to
obviously put up cash, which is commonly referred to as margin in futures
trading. A proper margin must be maintained for the life of the trade.
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