Introduction

Modern futures markets have been traced to the trading of rice futures in eighteenth century Osaka, Japan. In the United States, futures trading began in the mid-nineteenth century with corn contracts in Chicago and cotton in New York. Today, futures and options on futures trading is a leading financial activity throughout the world, with contracts traded on a wide variety of commodities, financial instruments and indexes.

Exchange-traded futures and options on futures provide several important economic benefits, including the ability to shift or otherwise manage the price risk of cash market or tangible positions. As open markets where large numbers of potential buyers and sellers compete for best prices, futures markets effectively discover and establish competitive prices. In part because these markets provide the opportunity for leveraged investments, they attract large pools of risk capital. As a result, futures markets are among the most liquid of all global financial markets, providing low transaction costs and ease of entry and exit. This, in turn, fosters their use by an array of business enterprises and investors to manage their price risks. And the savings resulting from effective risk management can be passed on to the final consumers of the commodities, currencies and financial instruments that underlie the futures and options on futures contracts.

Figure 1
Annual Futures & Options on Futures Contract Volume
[Courtesy of FIA]

Today's futures industry functions with a number of time-tested institutional arrangements, including clearinghouse guarantees and exchange self-regulation. Futures and Options on Futures Markets also reflect a tradition of innovation and growth, with new products, new exchanges and record trading volumes appearing each year. And while the U.S. markets have continued their pattern of steady expansion, recent increases in trading activity have been most pronounced outside the United States in the newer markets of Europe, Asia, Australia and Latin America, as evidenced in Figure 1.