futures

The word futures in the financial sense is simply the plural of future (Latin futurus, about to be), applied to contracts that specify the future. A futures contract is not a purchase — it is a commitment to purchase or sell at a predetermined price, at a predetermined date. The buyer and seller agree now on what will happen then. The time element is the entire point.

Ancient grain markets practiced proto-futures trading. Babylonian farmers in Mesopotamia, around 1750 BCE, made forward contracts for grain delivery — guaranteed prices for future harvests. The Code of Hammurabi contains provisions for these forward agreements. Dutch merchants in the 17th century traded 'tulip bulb futures' — contracts for tulip bulbs to be delivered at planting season — in the speculative frenzy known as Tulip Mania (1636-1637). When prices collapsed, futures contracts for tulips became worthless.

The Chicago Board of Trade (CBOT), founded in 1848, created the first organized, standardized futures market for agricultural commodities. Midwest farmers needed to sell their harvests at guaranteed prices before harvest; grain merchants needed to buy at known prices before grain arrived. The CBOT standardized contract terms (quantity, grade, delivery date) and created a clearing mechanism that guaranteed settlement. The modern futures market was born.

Financial futures — futures on currencies, interest rates, stock indices — were introduced in the 1970s as currency volatility increased after the end of the Bretton Woods fixed-exchange system in 1971. Currency futures at the Chicago Mercantile Exchange (1972) let companies hedge against exchange rate changes. Options, swaps, forwards — the futures market spawned a family of derivative instruments that now dwarf the underlying commodity markets they were designed to serve.