History of derivatives in finance (episode 2)

History of derivatives

In some documentary’s and some media coverage events about finance one could see how some journalists find it in common to deal with derivatives they would find it weird for example for commodities that are not yet at disposal to be sold in the future to derivative culture actually derivatives are not going through the history of mankind one could find examples of

Early derivative contracts that were agreed upon by merchants so here is two different professional journalists and here is to the incautious media hungary jones out there before getting to it we should first recall the definition we gave of financial derivative in the last video this definition states that a derivative is a financial product whose value depends on

The underlying asset which actually means that a derivative is a contract that gives either rights or duties and whose value either increases or decreases through time dependent on the underlying price around 1792 bc hammurabi ruled over babylon during his reign he has enacted what is known as the code of hammurabi this code contains a set of rules that regulated the

Life of maddaloni in people the 48th law of the code states the following if anyone over death for a loan and the storm frustrates the grain or the harvest fail or the grain does not grow from lack of water in that year he need not give his creditor any grain he washes his debt tablet in water and pays no rent for the year this would actually mean in one sentence

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That in case of a bad harvest the interest that has to be paid during that year is excused if we write that down taking k as the amount that has to be paid and sg has the value of the crops at disposal at the end of the year then the rule can be put this way if the value that has to be paid is higher than what the farmer has then the difference which is k minus st

Doesn’t have to be paid which can be considered as the payoff in that case on the other hand if sg is strictly higher than k then the entire value is paid and the payoff is 0 which means that the whole situation translates into a standard foot option archeologists also found contracts from that time in which one part agrees to sell an amount of a commodity such as

Grains at a future date and at a predetermined price which would translate into today’s financial jargon to a forward contract in his article named qualities iris total reported that tullis of villages a famous philosopher and mathematician who lived during the sixth century bc has predicted once during wintertime that the olive harvest would be larger than what

People thought armed with this conviction he managed to negotiate with olive press owners to sign an agreement that would give him the right but not the obligation to hire all the olive presses at a defined price in exchange for premium come harvest time as his prediction was right tallis exercised his right and managed to rent the olive presses at a substantially

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Higher price which made him a lot of money the agreement dallas made is exactly what is known now as a call option during the roman era forward contracts were allowed as a tool to maintain the supply of commodities related to food these contracts were regulated by the roman law and were agreed upon in the commodity markets that were organized by the romans during

The middle ages commercial partnerships in the image of forward contracts were used to facilitate the import of goods a great example of that would be the italian commanders in which one party delivers money in exchange for goods that would be delivered in the future the modern futures contract as we know it now was developed in the u.s. by the chicago board of

Trade the ledger easily exchanged that was founded in 1800 and who’s the initial goal was to bring the farmers and the merchants together in attempt to standardize the quantities and qualities of the grains traded the chicago mercantile exchange which was founded in 1919 started also dealing with futures contracts right away the first standardized options started

Trading in the chicago board options exchange in 1973 and then evolved into taking more stocks as underlying products as well as given the right to sell the underlying in what would be known as a put option in 1977 derivative products are not new the need of a constant flow of commodities as well as the reduction of risk pushed rulers throughout history to create

Or allow these kinds of contracts so next time you see someone who cannot wrap his mind around the fact of selling or buying a commodity that is still in the ground or that has not been harvested yet send him the link of this video by doing that it would have enlightened the lost bean and you would have done your good deed of the day

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Transcribed from video
History of derivatives in finance (episode 2) By Mister Derivatives