Futures contracts on currency were once restricted to large firms looking to hedge their risk as they did business overseas. Individual speculators had a hard time getting anyone to satisfy their contracts. The International Monetary Market (IMM) opened to satisfy this untapped market segment. Part of this exclusive thinking came from the sorted history of previous futures exchanges. The biggest problem IMM faced was the fact the government was still using a fixed trading system with many of our European allies. When the government finally gave up regulating exchange rates the flood gate opened wide, attracting business to invest in futures currency. Most of Fischer Blacks involvement in this process involved writing papers and developing models to price the rapidly growing number of securities. These models kind of jump started the industry, as they helped guide investors in the new market to set efficient prices.
C for Skylar. I think you mean "sordid" not "sorted". Also, how many Blacks are there?
ReplyDeletePrior to this time, banks traded "bags" of foreign currency with each other (and the government) at a fixed exchange rate, plus some transaction fees.
When Bretton Woods broke down and the developed economies shifted to flexible exchange, the prices of all those "bags" of foreign currency had to be negotiated individually.
If the International Money Market hadn't been created around that time, someone would have had to create something similar anyway.
Even so, the idea was not an immediate success. It took the collapse of the system of banks continuing to do things the old way and not being able to handle the new exchange rate volatility in 1975 for this market to take off.