The Genesis of Currency Futures and the International Monetary Market

Back in the 1960s and early 70s the Chicago Mercantile Exchange (CME), as it was known back then, traded primarily agricultural futures. While CME launched many products, they were always known as an agricultural exchange that traded mainly cattle, pork belly and butter.

But in the greater financial industry, trading in foreign exchange (FX), interest rates and other financial instruments started to garner as much attention as agricultural instruments such as Live Cattle, with currencies leading the way. Most of the FX market was based on fixed rates of exchange for various currencies, but as the breakdown of the Bretton Woods treaty came to pass, some individuals thought FX markets would begin to trade with much more volatility.

Enter Leo Melamed (the founder of financial futures) and Milton Friedman, the Nobel Prize winning economist from the University of Chicago. Melamed reasoned that with FX markets poised for greater price volatility, banks and corporations might find a futures contract to be a valuable tool, like agricultural futures were for the farming community. Melamed was quite young when he came up with the idea for trading futures on currencies and he was concerned that he would not be able to secure the board of directors’ approval.

To bring credibility, Melamed reached out to one of the most credible sources in the world of economics to write a feasibility study on FX futures, Milton Friedman. Friedman was hugely in favor of such a tool, as were several central bankers and others.

And thus in 1972, CME began trading futures contracts on several currencies. Milton Friedman charged the CME Group about $7,500 for the study; given that FX trading is worth hundreds of millions, if not more to the CME, it was one of the greatest trades ever made. FX futures went on to be a huge success and continue to be a crucial asset class, contributing to CME - the largest and most diverse derivatives exchange in the world.

About the Author

Dave Lerman, a CME Group employee for 28 years, has played a key role in numerous product launches, including the E-mini S&P 500. He has traveled the globe giving seminars and workshops on trading and risk management, and is the author of Exchange Traded Funds and E-mini Stock Index Futures.

Prior to joining CME Group, Dave was a member at the CBOT. He was a senior Portfolio Manager at Zavanelli Portfolio Research, taught investment management at Harper College and has lectured at the Northwestern University Kellogg Graduate School of Management.