Freight Derivatives


DEFINITION of 'Freight Derivatives'

A financial instrument's value that is derived on the future levels of freight rates, such as "dry bulk" carrying rates and oil tanker rates. Freight derivatives are used most often by end users (such as ship owners and grain-houses) and by suppliers (such as integrated oil companies and international trading corporations) to mitigate risk and hedge against price spikes in the supply chain.

As with all derivatives, market speculators, like hedge funds and individual traders, participate in both the buying and selling of these contracts providing for a new, more liquid, marketplace.

BREAKING DOWN 'Freight Derivatives'

Freight derivatives now include exchange-traded futures (ETFs), swaps futures and the older "Forward Freight Agreements", which were sold over-the-counter. Freight derivatives are most often used to hedge risks against large swings in price, a model popularized in the agriculture and commodities industries.

Freight derivatives are a relatively new product in the global marketplace, but the advent of clearing services has brought increased safety, and with it liquidity, into the business.

  1. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  2. Futures Market

    An auction market in which participants buy and sell commodity/future ...
  3. Derivative

    A security with a price that is dependent upon or derived from ...
  4. Forward Contract

    A customized contract between two parties to buy or sell an asset ...
  5. Assembly Service

    Combining a number of small shipments from multiple parties into ...
  6. Cass Freight Index

    A measurement of the monthly aggregate shipment of freight that ...
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  1. What is the difference between hedging and speculation?

    Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying ... Read Full Answer >>
  2. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between ... Read Full Answer >>
  3. What is the difference between forward and futures contracts?

    Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell ... Read Full Answer >>
  4. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  5. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  6. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>

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