Freight Derivatives – Toward a Market That Really Works

Swaps and options have been used since the late 1980′s along with their older cousin, futures, sometimes successfully, to manage risk concerning interest rate and foreign exchange exposure, in the bulk shipping industry. They have also been used to manage fuel cost exposure for Buyers of marine fuel. This article asks why a great deal of potential for market penetration still exists, for controlling freight rate exposure (for Buyer of freight) or to manage freight revenues (for Owners) and offers some prescriptions for pro-active players.

The bulk shipping industry is well known for having large amounts of money at stake, with chartering decisions made quickly on what little data is available. And then, once a decision is made on what to do, the difficulties in executing the strategy are also apparent to many principals and brokers. When “paper,” i.e. futures, options and derivatives, came on the shipping scene in the 1980′s, they offered a potential to solve these problems of price discovery (i.e., where is the “market”?) and ability to execute a transaction. Reading the sales literature from banks and futures brokers would suggest that industry participants can find panacea by hedging. Yet, futures and derivatives have made little headway into certain parts of the business.

This is only an excerpt of Freight Derivatives – Toward a Market That Really Works

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