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History of derivatives, Part 2: Forward contracts

Futures of King Hammurabi - Official Olymp Trade Blog

Imagine, people invented forward contracts to protect against risk thousands of years ago. Surprisingly, the first documentation about this dates back to the 18th century BC. In this video, you’ll learn about a brief but informative history of the emergence of forward contracts. Happy viewing!

Subtitles for video are available in English.

Brief contents

The history of forward contracts dates back to the 18th century BC. But where did they first appear, and who was their creator?

In this video, we will share how forward contracts came about in the ancient world as well as a successful ancient Greek trader.

The first forward contract 📃

It may be hard to believe, but the first forward contract was created in ancient Babylon — a cultural and economical hub for scholars, merchants and goods worldwide. In the middle of the 18th century BC, King Hammurabi, who ruled this city, developed his own influential code of law. For the first time in human history, forward contracts were mentioned among them.

Buyers and sellers (often farmers) could agree in advance on the number of goods and the price for those goods, which could not change under any circumstances.

By order of King Hammurabi, such transactions were concluded in front of witnesses and only in paper form. Thus, a deal was concluded between parties to supply goods at a certain price. Four thousand years later, we call it a forward contract.

There is an opinion among historians that the first forward contracts, written on cuneiform tablets, were the subject of resale just as they are in our time.

Evolution of forward contracts 💰

With the help of forward contracts, buyers and sellers protect themselves against market risks while ensuring a mutually acceptable price for the goods — but innovators have always been around.

According to Aristotle, a man named Thales from Miletus filled his coffers to the brim and then some, all on market speculation. He made a lot of money without buying or selling any particular product. Definitely a talented trader.

The ancient Greek merchant Thales 🫒

Despite Thales being a poor philosopher, he managed to predict a plentiful harvest of olives and make a fortune. How was this possible? It required only an accurate prediction and a lucrative contract with the owners of olive presses.

The owners of the presses were unsure of how successful the coming year’s harvest would be, and agreed to squeeze oil only for Thales. It was their way of ensuring a turnover on their product in uncertain times.

As Thales’ prediction came true, the demand for olive oil presses skyrocketed. Thanks to the market turning in Thales’ favor, the once-poor philosopher could sell contracts on olive oil at a great profit.

This is an amazing story of how, without growing olive trees or working a press, the ancient Greek philosopher Thales managed to become a rich man who made a name for himself in the annals of history.

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Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.