Photo: Wikimedia COmmons
File this under: Things we never knew.Brandeis University professor Stephen G. Cecchetti has on his website posted a snip from his textbook on the origin of derivatives.
It includes the story of the first-ever options trade in recorded history:
In financial markets, the term “derivatives” is used to refer to a group of instruments that derive their value from some underlying commodity or market. Forwards, futures, swaps and options are all types of derivative instruments and are widely used for hedging or speculative purposes. While trading in derivative products has grown tremendously in recent times, early evidence of these types of instruments can be traced back to ancient Greece. Aristotle related a story about how the Greek philosopher Thales profited handsomely from an option-type agreement around the 6th century b.c. According to the story, one-year ahead, Thales forecast the next olive harvest would be an exceptionally good one. As a poor philosopher, he did not have many financial resources at hand. But he used what he had to place a deposit on the local olive presses. As nobody knew for certain whether the harvest would be good or bad, Thalus secured the rights to the presses at a relatively low rate. When the harvest proved to be bountiful, and so demand for the presses was high, Thalus charged a high price for their use and reaped a considerable profit.
A critical attribute of Thales’s arrangement was the fact that its merit did not depend on his forecast for a good harvest being accurate. The deposit gave him the right but not the obligation to hire the presses. If the harvest had failed, his losses were limited to the initial deposit he paid. Thales had purchased an option.
(Via Steve Hsu)