Final Freight Derivatives - Grp 4

8/8/2019 Final Freight Derivatives - Grp 4

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Freight derivativePresented by:Ankush Sinha

31AnoopSharma32

Archit Khare33

Arti Sood34

Arun Dalal35Baishali Sen36

Chinamaya Dash

37


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Roadmap

1. Current Developments inShipping Markets

2. Fundamentals of ShippingMarkets

3. Highly cyclical shipping

industry4. Forward FreightAgreements (FFAs)

5. Underlying asset6. Quotes Duration7. Trading

8. Market Participants9. Role of the Baltic Exchange10.Indices11.Baltic Capesize Index (BCI)

12.FFA Settlement

13.Freight Rate Formation inthe Market

14.World scale

15.TD3 -Example Trades

16.TD3 Options

17.Uses of FFAs

18.Uses of FFAs: ForwardCurves

19.Uses of FFAs: Trading

Opportunities20.Risks

21.Dealing with Credit Risk

22.FFAs Future Trends

23.Freight Derivatives in

INDIA


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Current Developments inShipping Markets

Freight as a new commodity

High volatility in the shipping markets

Sharp fluctuations and sudden changes inthe market

Entrance of new players in the shippingmarkets

trading houses and energy companies as

well as investment banks and hedge funds


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Fundamentals of ShippingMarkets

Freight rates reflect the cost oftransporting bulk commodities by seaacross different parts of the world

Market Segmentation Across Type of Commodity

Wet Market: Transportation of Crude Oil andOil products

Dry Market: Dry Bulk Commodities Grainsand agricultural, Coal, Iron Ore etc.

Across Sizes Commodities are transported in different sizes

according to their Parcel Size Distribution

Function


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Highlycyclicalshippingindustry


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Forward Freight Agreements(FFAs)

An FFA is a Swap Principal to Principal contract with a buyer

and a seller An agreement today to buy or sell a freight

rate at a Certain level for a defined period in the

future.To settle at a future date at a price based on

freight

Cash settled

Flexible periods (12 to 36 months horizoncan go to 10 years)

Tradable on different routes and vessels


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Freight rateo Prices in the freight market are termed

freight rates

o Are expressed in terms of $/day (time-charter) or $/tonne (voyage charter)

o

The freight market is highly segmentedand freight rates are specific to:

Vessel type

Route

Duration of charter agreement

Underlying Asset


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Quotes Duration

Prices are listed monthly for the firstsix months

Quarterly for six more quarters then

Calendar quotes are posted for twoyears out.

Accordingly 2-4 year quotes areprovided


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Exchange traded Settled against various freight rate indices

published by the

Baltic Exchange (for Dry and most Wet

contracts) &

Platt's (Asian Wet contracts).

FFAs are often traded over-the-counter

Through broker members of the Forward

Freight Agreement Brokers Association -

FFABA

Exam le :Clarkson's Securities SSY -

Trading


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Market Participants

Ship owners Charterers Banks Brokers

GFI, Prebon and TFS

Investment Banks Morgan Stanley, Barclays Bank

Oil companies BP, ConocoPhillips, Shell and Total

Hedge Funds

Clearing Houses NOS LCH


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Responsible for standardizing a set ofroutes

Sets the rules and oversees theprocess of collecting andprocessing the brokersassessments of freight rates in

more than 40 cargo routes Settlement Rates :Average of the

rates for the contract route over

the contract period

Role Of Baltic Exchange


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Indices

Dry Market Baltic Capesize Index (BCI)

(150,000+ dwt)

Baltic Panamax Index (BPI) (70,000+dwt) Baltic Supramax Index (BSI)

(52,000+dwt)

Wet Market Baltic Tanker Index (Dirty and Clean)

Baltic LPG Index (44,000cbm)

Platts Assessments


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( )Baltic Capesize Index BCI

Route

Desc

FFAs can be traded against any of theseindividual routes or against the averagesof Routes 8 to 11

,Most trades concentrate on C4 C7 and the average of-C8 C11


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FFA Settlement

On settlement,

if the contract rate


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Freight Rate Formation inthe Market

( -T h e sup p ly o f ship p in g service s is th e a m o u n t to n

)m ile s o f tra n sp o rta tio n se rvice o ffe re d b y sh ipo w n e rs'fle e t b a se d o n th e o p tim iza tio n o f th e irrev en u e

Stock of the fleet Shipbuilding production Scrapping and losses

Spot freight rates are determined through the interaction ofsupply and demand for shipping services at any point intime

,The demand for sea transportation is a derived demandwhich depends on world economic activity and

international trade The world economic activity Seaborne commodity trade Average haulD

em

an

d

Supp

ly

Political events Transportation cost

Fleet productivity Freight rates


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New Worldwide Tanker Nominal FreightScale (World scale) = annual publicationlisting $/MT for voyage between 2 ports.

WS rate -% applied to flat rate tocalculate the $/MT rate for specificvoyage between 2 ports.

Flat Rate x WS Rate = $/tonne rate

eg 5.40 x W150/100 = $8.10/MT

W o rld sca le


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TD3 -Example Trade

Buyer /Seller-We Buy Route-TD3

Period-Q4 07 Quantity-20kt Contract price-WS88 WS Flat Rate-17.72 Contract-FFABA / ISDA / Cleared Counterparty-OTC -Counterparty Risk


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TD3 Example Trade

Q4 07 has three monthly settlements.October: WS57, November: WS91, December: WS240P/L Calculation for October =Settlement Price -Contract Price x Flat Rate x Size of

Trade

(57%-88%)x17.72x 20,000 =(31%)x354,400October Loss = ($110,000)

SimilarlyNovember Profit = $10,000

December Profit = $540,000


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TD3 Trade Example

Conclusion

Our Trade has generated a profit of roughly

$440,000. If we were using the trade to cover physical

exposure then this would be available tooffset our increased freight costs in Q4.

A full 260,000mt trade would have

generated $5,720,000 By hedging we are able to fix our future

costs according to known FFA pricing . The decision not to hedge leaves unknown

risk exposure.

FFAs can effectively manage freight risk.


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TD3 Options

You buy a Call Option (The right tobuy)

Q4 08 W120 Call -Cost W10 Result.

If the market goes above W120 in Q4

08 you have all the profit, onceyour cost of W10 is covered.

If the market falls you only lose 10

Worldscale points.


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H ed g in g ( , )Cargo owners power utilities oil companiesare buyers of FFAs

Market information Forward curves

SpeculationFFAs give the possibility to profit fromfalling

freight markets Enhanced trading opportunities

( . . )Arbitrage trades e g API2 vs API4( , )Spread trades TD3 vs TD5 Cape vs Panamax

Collateral in ship finance transactions

Uses of FFAs


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Uses of FFAs: ForwardCurves

Forward curve is a snapshot of currentmarket

forward price expectations. An implied market forecast based on all

market

participants A method of comparing FFA opportunities

against

physical options.

Used for position and portfolio valuations.

Uses of FFAs: Trading


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Uses of FFAs: TradingOpportunities

Good liquidity in FFAs position tradability-buy and sell

High volatility position taking opportunities

More trading players than physical Investment banks, trading houses, hedge funds

Spread Trades Inter route spread, e.g. C4 v C7, TD3 v TD5

Inter month spread, e.g. 3rd

Q06 v 4th

Q06 Inter-size spread, e.g. P-4TC v C-4TC


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Risks

Credit Risk (Netting Facility by exchange)

Volatility of market

Unpredictability due to time horizon

Hedging and speculation

Basis risk

Liquidity risk

- Overall, less risky than physical market


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Dealing with Credit Risk

Trading cleared contracts

IMAREX with NOS in Oslo offer cleared FFAsand Options

London Clearing House, NYMEX andSingapore Exchange also provide clearingservices

Cleared FFAs provide protection against

counterparty default, however Margin requirement and initial deposits tie-

up a lot of capital

Margining and marking to market may

create a cash-flow mismatch between thepaper and physical markets


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FFAs Future Trends The market has grown sharply following deregulation

and liberalisation in the European Energy market asenergy and other traders seek to manage freightrisk

Recent high volatility in the market has also attractedinterest from investors outside shipping such ashedge funds

Credit Risk and Clearing

Clearing will also attract new players in the marketsas it also facilitates and speeds up negotiations

Electronic Trading

Emergence of Freight Options


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Freight Derivatives in INDIA

MCX in strategic collaboration with the BalticExchange proposed to introduce freightfutures contract in year 2004

Cargoes at Indian ports are expected to top 1billion tonne in 2011 compared to about 845million tonne last year. So huge potential forfreight derivative market.

MCX would create India-specific freightcontracts keeping into consideration India'slarge coastline consisting of ndia's largecoastline of 11 major and 139 minor ports


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Thank you

Documents

Final Freight Derivatives - Grp 4