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Indiaexportnews.com

Container derivatives may help forwarders offset losses

  18.08.2010    

The Container Freight Swap Agreement (CFSA), an intuitive risk management tool that allows hedging against price movements in Asian containerised export markets, has made its debut.
The new container derivatives scheme could help reduce forwarders' exposure to rate fluctuations, reports London's International Freighting Weekly.
Three main categories of participant who would most commonly trade CFSAs have been identified as those who are net long of physical seaborne containerised transport (the ship owner or operator); those who are net short the market (the shipper or freight forwarder); and those with no physical exposure, who seek to profit from market volatility by trading the pure swap (normally traders in investment banks).
Container swaps enable participants transporting sea freight to lock-in future costs and crystallise future margins up to 23 months ahead in a flexible manner. A container freight swap is a cash-settled agreement between two parties with an equal and opposite opinion of the future of the market.
The parties agree on a price in US$ per container for a given number of containers on an agreed route during a specified period. At the end of the contract period the parties settle the difference in cash between the predetermined contract price and the actual spot market price.
If the market strengthens, and box rates increase, then the buyer of a CFSA (the long position) benefits, since by entering the agreement they have effectively paid less, in advance, for the goods than they would have done trading on the spot market. The buyer of the CFSA has successfully hedged against an increase in cost of the underlying physical market.
Conversely, if the market softens, and box rates decrease, the seller of the CFSA benefits since they have effectively sold the goods, in advance, at a higher rate than they would have done trading on the spot market.
In this case the seller of the CFSA has been successful in hedging against an increase in cost of the underlying physical market.
CFSAs are currently available over-the-counter with clearing at LCH.Clearnet in London and SGX AsiaClear in Singapore.
The index used for settlement is the Shanghai Containerised Freight Index (SCFI), administered by the Shanghai Shipping Exchange.


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