Freight Derivatives: An Introduction By Low Buen Sin

Abstract

This case supplement to the Global Shipbroking case provides an overview of freight forward agreements and freight options, as well as developments in the freight derivatives market as at early 2010. Derivative contracts refer to contracts that trade the underlying asset in a manner that differs from a normal spot transaction. In May 1985, the Baltic Exchange through the Baltic International Freight Futures Exchange, launched a freight forward contract written on the Baltic Freight Index. The trading of the freight derivatives in the over-the-counter markets (OTC) began in the early 1990s. Basically there are two main types of freight derivatives - freight forward contracts and freight option contracts. The underlying asset for freight derivatives is the future levels of freight rates for a specific trade route or for a basket of trade routes. A freight rate refers to the price at which a certain cargo is delivered from one point to another.

Instructors may wish to follow up with "Global Shipbroking – New Challenges to Established Communities of Practice".

This case was commissioned by the Maritime and Port Authority of Singapore (MPA).
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Issues: Freight Forward Agreements; Freight Options; 'Cleared' Freight Derivatives

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