A NEW derivative scheme - called forward
freight agreements (FFA) - is being marketed in the air cargo field,
reports London's Loadstar.
Airlines and forwarders are now being offered a range of contracts to supposedly help both to manage risk by Freight Investor Services (FIS) together with the TAC Index.
"Brokers in the FFA markets can identify a forward spot rate, which the
forwarder can buy, protecting it against a change in the spot market
rate. It can then book with any carrier at the carrier's spot rate,"
Loadstar explained.
If the FFA contract rate is lower than that month's index average, the
buyer will be repaid the difference. The model could put an end to the
risks of volatility, which characterises the air cargo market.
For an FFA to work, it requires a well-developed freight rate index, in
which the market has confidence - something the TAC Index is said to
have achieved.
Said TAC Index managing director Peyton Burnett: "For illustrative
purposes, let's assume HKG-FRA is currently trading at HK$20/kg. But it
is forecast to be HK$25/kg in six months' time. Using an FFA contract,
parties can hedge against any difference in this forecast by locking in a
price six months' forward; with two parties either side of the trade at
HK$25/kg.
"Move forward six months and the index spot price is actually HK$27/kg;
otherwise known as the settlement price. One party will have made
HK$2/kg and the other would have lost the equivalent. The hedging party
would then be able to use the HK$2/kg cash to buy on the spot physical
market. A simple hedge.
Said FIS strategy chief Michael Gaylard: "Users want to move away from a
fixed price due to the price volatility. There is a desire to see how
this works, to figure it out on an accounting basis.
"There are very few markets left which don't have this, and definitely
nothing the size of air cargo. Air cargo is an enormous market that
really stands out - although one of the problems it might face is that
it is quite fragmented," he said.
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