A Legislation On Derivative Products: The Chicago Board Of Trade

2366 words - 10 pages

1. SUMMARY:
.
Derivatives are able to eliminate unexpected risks arising from the price volatility of an asset, however they have often been implicated in the most controversial organisational meltdowns and financial crises. The evolution underlying assets in derivative products have pushed the development of legislation to support these changes. The Chicago Board of Trade was the first centralised derivative trading market, since then the United States regulation on derivatives have served as a basis from other countries when regulating their markets. The research wants to evaluate the impact that the changes in the underlying instrument had on regulation. A historiography as a research ...view middle of the document...

America has leaded the derivative market with the first centralised derivative market and regulations were developed as the market developed as well. This also led to other countries allowing the developed regulations in the United States as their basis in regulating their derivative markets.
In this research proposal we will initially begin with a background to the subject where we will build up a basis to the research problem. An outline of the proposed research question and the research objectives will be conducted. The Literature studies will serve as a framework for the construction of the measuring instrument.

3. Background
The first logic of a derivative occurred in the Middle East, 2000 BC, were signs of an option contract were a document was drawn authorizing the bearer to receive in fifteen days set weight of lead deposited with the priestesses of the temple (Einzing, 1970). A more familiar derivative is that in the book of Genesis 29 in the Old Testament, 1700 BC, where Jacob bought an option to marry Rachel after seven years of labour (Chance, 1998), since then with the development of regulation and markets for this financial product aided dearly to its popularity. In 1792 to 1750 BC era we found emergence of a put option contract in the Code of Hammurabi, were in the 48th law were farmers who had mortgages had to pay interest if they had good harvest but were not obligated to do so when harvests were bad (Riederova & Ruzickova, 2011). 1400 BC saw the emergence of commercial contracts in Ancient Mesopotamia. Records were engraved on clay tablets arranging the future delivery of a commodity as stipulated on the record. These contracts were allowed for third party sale.
Derivatives designed by Greek philosophers were seen first around 625 and 550 BC in Miletus, Ancient Greece (Kummer & Pauletto, 2012). Thales, a philosopher and mathematician, predicted an extraordinarily high olive harvest to come. He then took the opportunity to negotiate with the olive press owners the right but not the obligation to hire all olive presses for the upcoming autumn season and paid a cash deposit to secure arraignment or right (Kummer & Pauletto, 2012). This can today be seen as a call option where the holder pays a premium to attain the right and not an obligation to purchase the underlying at a predetermined price and date (Sundaram & Das, 2011).
The Roman Empire in the 2nd century AD had stipulated two types of forwards under Roman law. These allowed for firstly the promise of future delivery of goods at a specified delivery date and secondly the purchase of an expectancy (Donkin, 2001). By the time the 10th century came, derivatives were the main instruments used to facilitate trade. Italian merchants used commandas, which were a type of commodity forward contract, were an investment was made in to the venture the ship was to undertake (Poitras, 2001). In 1848 the Chicago Board of Trade (CBOT) was established. A group of merchants formed a...

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