A speech by Leo Melamed during his November European Tour
A primer on futures
According to the Bank of International Settlements (BIS), the notional dollar value in 2013 of financial futures traded was an astounding one quadrillion, 886 trillion, 283 billion, and 4 million ($1,886,283.4 billion). Financial futures and options represented 81.3% of all futures contracts traded in 2013.
Here we are—after the crash of 2008, after derivatives were in some quarters blamed as one of the causes of the global meltdown—the use of futures markets and over-the-counter financial derivatives as tools with which to efficiently manage risk is stronger than ever.
These instruments are used by the largest and most sophisticated financial institutions in the world—domestic and international banks, public and private pension funds, investment companies, mutual funds, hedge funds, energy providers, asset and liability managers, mortgage companies, swap dealers, and insurance companies. In other words, financial entities that face foreign exchange, interest rate, energy, agricultural, environmental or equities exposure use the OTC and our futures markets to hedge or manage their price risk.
The CME Group (NASDAQ:CME)—as the largest and most diverse, exchange in the world featuring financial instruments—is clearly the biggest beneficiary of this trend. As the great boxer Muhammad Ali said, “It’s not bragging if it is true.” Allow me to offer a brief description of how some of that came about.
My very first lesson in economics occurred in Vilnius, today the capital of Lithuania. I was seven years old. Vilnius was the first stop in our escape after capture by the Nazis at the outset of World War II. One of my parents’ main concerns was that my education had been disrupted. My scheduled entry into first grade was indefinitely postponed. Right at the start of our two-year odyssey, as my parents with me at their side miraculously outwitted the Gestapo and KGB in a danger-filled escapade that spanned three continents, six languages, Japan, and happily concluded in the United States, my father became my private tutor. Early on he carefully demonstrated and explained about currencies, that their true value could only be determined by what they can buy in the marketplace. It was my first encounter with the logic of Milton Friedman and left an indelible impression.
Over the years, this lesson became fundamental to my understanding of the marketplace. It was fortified by attending classes at the University of Chicago. Not as a student, but I could not resist visiting the lectures of Milton Friedman, the 1976 Nobel Prize recipient in economic sciences. His 1962 book, Capitalism and Freedom, became my economic road map. His belief that economic freedom is a precondition for political freedom became my credo. His conviction in the free float for exchange rates validated my personal dream of a futures market for foreign exchange.