Derivatives have a long and complex history that dates back to ancient times, when traders used simple contracts to manage their risk exposure. However, modern derivatives as we know them today have their roots in the financial innovations of the 1970s.
In 1971, the US government abolished the gold standard, which had pegged the value of the US dollar to the price of gold. This led to a period of high volatility in currency markets, as currencies fluctuated in value relative to each other. In response, financial institutions began to develop new instruments to manage currency risk, including currency futures and options.
In 1973, the Chicago Board of Trade launched the first futures contract on a financial instrument, the Treasury Bond. This marked the beginning of a new era in financial innovation, as exchanges and financial institutions developed new types of derivatives to manage risk and to profit from market fluctuations.
In the 1980s, financial engineering began to take off, as financial institutions developed more complex derivatives, such as interest rate swaps and credit default swaps. These instruments allowed investors to manage risk more precisely and to create new investment opportunities. However, they also introduced new risks and complexities, which would later contribute to the global financial crisis of 2008.
In the 1990s, derivatives became increasingly popular among institutional investors, as well as hedge funds and other types of speculators. The notional value of derivatives grew rapidly, reaching trillions of dollars by the turn of the century.
The 2008 financial crisis brought renewed scrutiny to the role of derivatives in the global financial system. Many of the complex derivatives that had been developed in the preceding decades proved difficult to value and to manage, leading to significant losses for financial institutions and investors. As a result, regulators around the world implemented new rules and regulations to increase transparency and reduce risk in the derivatives markets.