DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACT.
Forward contracts are often confused with futures contracts. The confusion is primarily because both serve essentially the same economic functions of allocating risk in the presence of future price uncertainty. However futures are a significant improvement over the forward contracts as they eliminate counter party risk and offer more liquidity.
THE FIRST FINANCIAL FUTURES MARKET
Merton Miller, the 1990 Nobel laureate had said that “Financial futures represent the most significant financial innovation of the last twenty years.” The first exchange that traded financial derivatives was launched in Chicago in the year 1972. A division of the Chicago Mercantile Exchange, it was called the International Monetary Market (IMM) and traded currency futures. The brain behind this was a man called Leo Melamed, acknowledged as the “father of financial futures” who was then the Chairman of the Chicago Mercantile Exchange. Before IMM opened in 1972, the Chicago Mercantile Exchange sold contracts whose value was counted in Millions. By 1990, the underlying value of all contracts traded at the Chicago Mercantile Exchange totaled 50 Trillion Dollars.
The currency futures paved the way for the successful marketing of a dizzying array of similar products at the Chicago Mercantile Exchange, the Chicago Board of Trade, and the Chicago Board Options Exchange. By thel990’s, these exchanges were trading futures and options on everything from Asian and American stock indexes to interest-rate swaps, and their success transformed Chicago almost overnight into the risk- transfer capital of the world.
