Shreyansh
ECONOMICS
A Short History of Derivative Security Markets
By
Ernst Juerg Weber The University of Western Australia
DISCUSSION PAPER 08.10
A Short History of Derivative Security Markets
Ernst Juerg Weber Business School University of Western Australia Crawley WA 6009 Australia
eweber@biz.uwa.edu.au
August 2008
Abstract Contracts for future delivery of commodities spread from Mesopotamia to Hellenistic Egypt and the Roman world. After the collapse of the Roman Empire, contracts for future delivery continued to be used in the Byzantine Empire in the eastern Mediterranean and they survived in canon law in western Europe. It is likely that Sephardic Jews carried derivative trading from Mesopotamia to Spain during Roman times and the first millennium AD, and, after being expelled from Spain, to the Low Countries in the sixteenth century. Derivative trading on securities spread from Amsterdam to England and France at the turn of the seventeenth to the eighteenth century, and from France to Germany in the early nineteenth century. Circumstantial evidence indicates that bankers and banks were at the forefront of derivative trading during the eighteenth and nineteenth centuries.
i
Modern textbooks in financial economics often misrepresent the history of derivative securities. For example, in the opening sentence Hull (2006) suggests that derivatives became significant only during the past 25 years, and that it is only now that they are traded on exchanges. "In the last 25 years derivatives have become increasingly important in the world of finance. Futures and options are now traded actively on many exchanges throughout the world." (Hull 2006, p. 1) Mishkin (2006) is even more adamant that derivatives are new financial instruments that were invented in the 1970s. He suggests that an increase in the volatility of financial markets created a demand for hedging instruments that were used by financial institutions to manage risk. Does he really
A Short History of Derivative Security Markets
By
Ernst Juerg Weber The University of Western Australia
DISCUSSION PAPER 08.10
A Short History of Derivative Security Markets
Ernst Juerg Weber Business School University of Western Australia Crawley WA 6009 Australia
eweber@biz.uwa.edu.au
August 2008
Abstract Contracts for future delivery of commodities spread from Mesopotamia to Hellenistic Egypt and the Roman world. After the collapse of the Roman Empire, contracts for future delivery continued to be used in the Byzantine Empire in the eastern Mediterranean and they survived in canon law in western Europe. It is likely that Sephardic Jews carried derivative trading from Mesopotamia to Spain during Roman times and the first millennium AD, and, after being expelled from Spain, to the Low Countries in the sixteenth century. Derivative trading on securities spread from Amsterdam to England and France at the turn of the seventeenth to the eighteenth century, and from France to Germany in the early nineteenth century. Circumstantial evidence indicates that bankers and banks were at the forefront of derivative trading during the eighteenth and nineteenth centuries.
i
Modern textbooks in financial economics often misrepresent the history of derivative securities. For example, in the opening sentence Hull (2006) suggests that derivatives became significant only during the past 25 years, and that it is only now that they are traded on exchanges. "In the last 25 years derivatives have become increasingly important in the world of finance. Futures and options are now traded actively on many exchanges throughout the world." (Hull 2006, p. 1) Mishkin (2006) is even more adamant that derivatives are new financial instruments that were invented in the 1970s. He suggests that an increase in the volatility of financial markets created a demand for hedging instruments that were used by financial institutions to manage risk. Does he really
References: 46 Neal, Larry (2005) Venture Shares of the Dutch East India Company 48 Weber, Ernst Juerg (2003) The Misuse of Central Bank Gold Holdings