Long Road to Financial Derivatives
THE LONG ROAD TO FINANCIAL DERIVATIVES INNOVATION AND FINANCIAL SYSTEMS Commerce 320 Comparative Financial Institutions Submitted to: Professor Len Pedroza Submitted by: Olivier Ruta Queen’s University, International Study Center June 6th, 2003 TABLE OF CONTENTS INTRODUCTION 2 AN INTERNATIONAL FINANCIAL SYSTEM IN TRANSITION 2 THE CYCLICAL PATTERN OF THE GOLD EXCHANGE 2 THE RISE OF THE BRETTON WOODS AGREEMENT 3 THE US AS A BENCHMARK FOR OTHER NATIONS 4 THE UNITED KINGDOM FINANCIAL SYSTEM IN TRANSITION 5 THE BEGINNING OF A WELL-NEEDED FACE LIFT 5 FINANCIAL FUTURES AND OPTIONS 7 LIFFE PRODUCTS 7 WHAT THE FUTURE HOLDS 8 THE CREATION OF LIFFE CONNECT 8 CONCLUDING SUMMARY 9 REFERENCES 11 INTRODUCTION The concept of risk management, as a conventional business discipline, is a relatively new concept. It first came into existence in the United States over thirty years ago with the development of innovative financial instruments such as financial futures and options, and information technologies and has been adapted to fit financial systems throughout the world. This paper looks at the many ways the international financial system adapted itself to changes in the evolving global economy, but more specifically how the United Kingdom financial system did exactly that. AN INTERNATIONAL FINANCIAL SYSTEM IN TRANSITION In order to understand why interest rates and foreign exchange rates are so volatile today and have been so for the last 30 years, one has to look back at pre-WWI and post-WWII events. ... The next 30 years were stricken with extensive speculation in the stock market as well as with unequal distribution of wealth; both of which helped bring forth the great depression of the 1930s and a desperate need for global financial restructuring. ... The US as a Benchmark for Other Nations After the signing of the Bretton Woods Agreement, currencies around the world were dependent upon the dollar; largely in part because the United States had amassed almost all of the world’s gold supplies used for financial purposes. ... THE UNITED KINGDOM FINANCIAL SYSTEM IN TRANSITION Along with the rest of the world, the United Kingdom’s financial system, in order to keep up with the ever-changing global economy, needed a face-lift. After the fall of the Bretton Woods Agreement, the world relied on floating exchange rates and the birth of financial futures and options trading was fast approaching. ... The Beginning of a Well-Needed Face Lift To understand the change in the United Kingdom’s financial system, it is important, if not necessary, to look at the true pioneers of futures contracts trading: the United States. Financial futures trading began in the US in 1972 with the creation of the International Monetary Market (IMM) by the Chicago Mercantile Exchange. Moving from their historical agriculture base to a more financial purpose changed the direction and history of financial futures. ... Financial futures did not make their appearance in the UK until September of 1982, over 10 years after the creation of the IMM.