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Volatility

Up until the 1970s, derivatives had been a specialised and arcane area of financial markets. They had largely been employed by producers and consumers of commodities to fix the price at which they would transact in the future, so as to manage the risk of intervening price movements. For example, a farmer could use a futures or forward contract to lock in a price at which he could sell his grain to a store owner. If there was a bumper crop and the price of grain falls due to oversupply, then the farmer will have benefited by having been able to sell his crop at a higher price than he would have gotten otherwise. On the other hand, if there was a drought resulting in widespread crop failures, then the price of grain would be expected to rise, and the store owner will have benefited.

In the US, Chicago has been the traditional hub for derivatives trading, owing to its location close to the farmlands and cattle country of the Midwest and its role as a transportation and distribution hub for agricultural produce. The Chicago Board of Trade (CBOT) was formed in 1848 as a forwards market for corn. The Chicago Produce Board, later renamed the Chicago Butter and Egg Board, was founded in 1874. This was later reorganised as the Chicago Mercantile Exchange (CME) in 1919.

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