Economics · Stories

The Naughty – Sorry, The Nautical Origin Of Derivatives.

The timetable of a steamship line. Gamblers could wager as to whether a ship would dock early or late.
The timetable of a steamship line.
Gamblers could wager as to whether a ship would dock early or late.

A derivative is, at its most basic a contract between two people which reflects the movements of an agreed system. Usually this is a share price or an entire market, but they did not start off this way. Derivatives actually began when shipping lines began advertising timetables for their services across the Atlantic from Liverpool in the 1850s, yet owing to the vagaries of the weather, sometimes made port early or late. A sharp speculator made a wager with a friend of his that the steamer SS Thames would arrive on time, and would be paid an agreed amount per day should she be early (going “short”). The opposite was also true, and the friend stood to make money should the ship be late (going the “long way around” or simply long).

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