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The Roots of Currency Futures

Back in the 1970s, trading was definitely simpler. Trading at the CME for instance was rooted in food products. The world would soon become more complicated. One of the biggest changes in economic history occurred in the beginning of the 1970s, with the abandonment of the gold standard. From post-World War II to the early 70s, the Bretton Woods system provided both a gold standard and fixed exchange rates between nations.

Changing this system would have major impacts. For one, the old system offered stability and predictability that had become familiar to everyone. Moving to a system where nothing was certain about currencies would be an obvious cause for concern. Chairman of the Chicago Mercantile Exchange Leo Melamed had these issues in mind when he  considered adding currency futures to the CME. Currency futures had been tried recently by the International Commercial Exchange in New York. The scenario was different now though, because of the abandonment of Bretton Woods.

Melamed looked to the foundational purpose of futures contracts that could now shine: hedging. Melamed foresaw a world where people would increasingly want to hedge against unfavorable movements of particular currencies. He figured this new demand could be high, especially for large financial institutions and wealthy companies.

This is where one of the most famous modern economists comes into play, a man called Milton Friedman. Friedman met Melamed, and they discussed his idea of currency futures. Though Friedman had not yet won the Nobel Prize (that would come in 1976), he was still one of the most highly respected voices in economics. Friedman loved the idea, and Melamed asked him to write a feasibility study on currency futures. The CME favored the idea, along with bankers across the board. Oddly enough, Friedman was paid under $10000 for this report though it would make the CME a fortune. The CME began trading currency futures in 1972 and they have been a mainstay ever since.

Currently, the trading of currency futures can easily exceed 700,000 contracts per day. That is for the CME alone, and the amount of currency these contracts are based on can hit $100 billion per day. All major currencies of the world can be traded in futures contracts, and they are settled monthly.

See in: Informative
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