Courses 1Lesson 1

Evolution of the Futures Markets

Trading in futures had its origin in the development of grain trading in the United States in the

mid-1800s.

The Japanese futures exchange began over a hundred years earlier than it did in the U.S. Their methods

of trading in the silk and rice markets, as well as the English methods of trading iron warrants, were

precedents to the United States futures markets.

The practice of futures trading in the United States evolved naturally from the need to protect against

volatile price moves in physical grain products.  Chicago took the leading role as the center of grain

futures trading.

The Midwest is the heart of a rich and vast agricultural region and, since Chicago is strategically

situated as a shipping center, it was a natural site for grain trading.  The Mississippi River and its

tributaries were available to move grain and later, in conjunction with the railroads, commerce in the

grain markets flourished.

The Chicago Board of Trade was organized in 1848 and actually began trading about 1859.  It was

formed to meet the needs of producers (farmers) and exporters in order to systematically manage their

risk and exposure to unknown elements such as weather, political events and economic uncertainty.

The concept of hedging, upon which the futures markets are based, became widely used and continues

today to serve as a valuable tool for risk management.