What is a freight derivative?
A freight derivative is a financial contract between two parties, which sets an agreed future price for carrying commodities at sea. The contract does not involve any actual freight or any actual ships. It is purely a financial agreement - much like that found in other commodity futures markets. At IMAREX you can trade Freight Futures, Freight Options and OTC Freight Forwards (FFAs)
Shipping markets are large commodity markets and all characteristics for financial derivatives are present.
Tanker and Drybulk chartering both have a significant underlying market size:
- 4 billion Metric tonnes per year
- Underlying value: Tank USD 40 billion
- Underlying value: Dry Cargo USD 80 billion
Both markets experience very high volatility in spot and long term prices:
- 20 day volatility up to 70%
- Volatile asset values directly tied to freight rates
Exceptionally high volatility in the price of freight, means that in the physical underlying markets - which are the world shipping markets, natural buyers (refiners, importers, traders etc) have to take into account a high risk of price movements in freight when calculating the cost of transport.
Commodity market characteristics are:
- Standardized contracts (routes, cargoes and shipment sizes)
- Common pricing structure
- Price transparency (active spot market)
On Imarex, Principals (those trading directly for their own account) trade freight derivatives electronically on screen in real time, or via an Imarex Exchange Broker in Oslo or Singapore. All principals trade anonymously, and with the security of "Straight through Clearing".