Before Futures Trading came about, any producer of a commodity (e.g. a farmer growing wheat or corn) found himself at the mercy of a dealer when it came to selling his product. The system needed to be legalized so as that a specified quantity and quality of product might be traded between producers and dealers at a specified date.
Contracts were drawn up between the two parties specifying a certain quantity and quality of a commodity that would be delivered in a particular month...
...Futures trading had begun!
In 1878, a central dealing facility was opened in Chicago, USA where farmers and dealers might deal in ‘spot’ grain, i.e., immediately deliver their wheat crop for a cash settlement. Futures trading evolved as farmers and dealers committed to buying and selling future exchanges of the commodity. For instance, a dealer would agree to buy 5,000 bushels of a specified quality of wheat from the farmer in June the following year, for a specified price. The farmer knew what quantity he would be paid ahead, and the dealer knew his costs.
Until twenty years ago, futures markets consisted of only a few farm products, however currently they have been joined by a large number of tradable ‘commodities’. As well as metals like gold, silver and platinum; livestock like pork bellies and cattle; energies like crude oil and natural gas; foodstuffs like coffee and orange juice; and industrials like lumber and cotton, modern futures markets include a wide range of interest-rate instruments, currencies, stocks and other indices like the Dow Jones, Nasdaq and S&P 500.
Posted on Monday, 26 of March, 2012.