Wednesday, September 2, 2009

Financial futures

Beginning in October 1975, the Chicago board of trade opened active trading in future contracts for GNMA mortgage-backed certificates. In the ensuing months, futures contracts for U.S. Treasury securities and commercial paper appeared on the scene. Important financial instruments traded in the future market today. The development of future markets for these securities was motivated by the extremely volatile interest-rate movements which have characterized the financial markets for the past two decades. Repeatedly, interest rates have risen to record levels under the pressure of tight money policies and inflation, shutting out important groups of borrowers from ready access to credit.
These high and volatile rates have been a source of concern to regulatory authorities in the field of banking and financial institution. Rising interest rates reduce the value of securities held by financial institutions, threatening them with a liquidity crisis and, in some cases, ultimate failure. Some members of the regulatory community have favored the growth of financial futures as a way to reduce the risks associated with security investments. However, as we will soon see, other regulatory authorities feel that the development of the futures markets may have encouraged speculation and increased the riskiness of those financial institutions participating in futures trading. These regulatory agencies have placed tight restrictions on the use of the futures markets, especially by commercial banks.
Overall, the growth of trading in financial futures has been impressive. For example, the volume of trading in the financial futures at the Chicago Board of Trade was less than 1 million contracts in 1977, topped 3 million in 1979, and soared to nearly 9 million in august 1980, the third anniversary of trading in U.S. Treasury bond futures, more than 6 million T-bond contracts had exchanged hands, with a total par value of about $600 billion.

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