What is the International Monetary Market?

Jason C. Chavis

Established on 16 May 1972, the International Monetary Market is part of the Chicago Mercantile Exchange. As one of the exchange's three main divisions, the International Monetary Market is primarily involved with the futures contract market for the United States. Providing brokers and investors with options on futures, it focuses mainly 90-day U.S. Treasury bills and Eurodollar time deposits, but also offers other types of futures contract options. The forum is the second largest in the world next to the Eurex exchange, making it one of the world's largest markets for derivatives.

Man climbing a rope
Man climbing a rope

After the establishment of the Chicago Mercantile Exchange in 1919, the market for futures contracts grew heavily over the next few decades. This prompted increased standardization and the creation of a federal agency to oversee the exchange, the Commodity Futures Trading Commission. Futures contracts within the exchange were soon placed into specific date and quantity packages within their derivative form. Certain requirements on margin and obligatory rules were put into place. Guaranteed prices were commonplace, creating a market that could hedge against unseen events such as foreign political upheaval that affect exchange rates.

During the Nixon administration, the dollar became heavily devalued with the move from the gold standard. In addition, foreign markets were destabilized from fluctuation in exchange rates and monetary practices around the world. This was the final straw for investors interested in hedging against untimely losses from market fluctuations, especially for large financial institutions. This caused the creation of the International Monetary Market, which focused on securing prices on commodities within the United States and other nations, particularly grains, lumber and precious metals.

Investors and speculators deal with the International Monetary Market for a variety of reasons. The primary concern most people have is the fact that the prices of future securities can be very volatile. By establishing a system of guaranteed options, investors can hedge against extremes in the market. For example, a corn farmer will deliver a specific amount of corn on a particular date. By establishing the price for this corn ahead of time, the farmer can hedge against a potential loss in profit from excessive production by competition.

Three types of investors deal in futures contracts in the International Monetary Market: hedgers, speculators and scalpers. Hedgers purchase the underlying security and use futures contracts to prevent an unwanted fluctuation. Speculators invest in the futures with the goal of profiting from the rise or fall of the commodity price. Scalpers simply buy and sell the contracts on the actual floor of the exchange with the plan to resell to both hedgers and speculators.

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