Jacob Bogatin: what are futures and how do they work

Earlier, Jacob Bogatin had already raised the topic of derivative financial instruments (derivatives) and described some of their classes. Very often it is precisely about buying or selling such exchange instruments that they talk about “selling air” and harmful speculation. In fact, the importance of the same options and futures for the stock market and, more broadly, for the country’s economy, can not be overemphasized. Today we are talking about futures contracts and the logic of working with them.

Futures History
The first futures exchange appeared in Osaka, the ancient capital of Japan, back in the Middle Ages, it traded the future rice harvest, says Jacob Bogatin. However, modern futures trading originated in Chicago in the mid-nineteenth century. In the 1840s, Chicago became a commercial center of the Midwest. This was facilitated by a convenient geographical location, as well as an established infrastructure (railway and telegraph). According to Jacob Bogatin, around the same time, inventor Cyrus McCormick, having completed his father’s project, presented a grinder for processing grain, thanks to which the productivity of farms increased.

Farmers from the Midwest came to Chicago to sell their grain to dealers, but then there were no established procedures for assessing the product or determining its exact weight. Very often all this remained at the discretion of the dealer. Also, farmers who brought the goods (grain or livestock) could find that there are already so many in Chicago, and the supply far exceeds demand, which affects the price of the goods, says Jacob Bogatin. The buyers, in turn, faced the problem of grain transportation, especially in the winter.

Because of such severe conditions, farmers and traders began to conclude contracts with delayed delivery of goods. The scheme could be as follows: the farmer sells the grain to the merchant at the end of autumn or early winter, which he must store until it is possible to transport it, for example, along the river. At the same time, no one canceled the risk of falling prices for the winter. To protect themselves from this, traders who bought grain, went to Chicago and concluded contracts in addition to that processors for the supply of grain in the spring, says Jacob Bogatin. Thus, they guaranteed to themselves and buyers, and an acceptable price for grain.

In 1848, the first of the Chicago commodity exchanges was created, which was called the “Board of Trade of the City of Chicago – CBOT,” notes Jacob Bogatin. Moreover, on March 13, 1851, the first futures contract for 3 thousand bushels (about 75 tons) of corn was concluded on this exchange site with delivery in June at a price of 1 bushel, which was lower by that day for one cent.