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.

RELATED TERMS
  1. Baltic Exchange

    An exchange that handles the trading and settlement of both physical ...
  2. Cass Freight Index

    A measurement of the monthly aggregate shipment of freight that ...
  3. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
  4. Derivative Product Company - DPC

    A special-purpose entity created to be a counter-party to financial ...
  5. Derivative

    A security with a price that is dependent upon or derived from ...
  6. Energy Derivatives

    A derivative instrument in which the underlying asset is based ...
Related Articles
  1. Trading

    Derivatives 101

    A derivative investment is one in which the investor does not own the underlying asset, but instead bets on the asset’s price movement with another party.
  2. Trading

    What Is A Derivative?

    A derivative is a security whose price is dependent upon or derived from one or more underlying assets. Learn more on how investors can use this financial instrument in their trading strategies.
  3. Markets

    Bulk Carrier Vs. Container Vs. Tanker: Exploring the 2016 Shipping Market (C)

    Read about the divergent fates of oil tankers, dry bulk carriers, container ships and other seafaring vessels in the 2016 shipping market.
  4. Trading

    Futures, Derivatives and Liquidity: More or Less Risky?

    Futures and derivatives get a bad rap after the 2008 financial crisis, but these instruments are meant to mitigate market risk.
  5. Investing

    Derivatives 101

    Learn how to use this type of investment as an alternative way to participate in the market.
  6. Markets

    Explaining Cost, Insurance and Freight (CIF)

    Cost, Insurance and Freight, or CIF, is a trade term that means the seller must pay the costs needed to transport goods to a port of destination.
  7. Trading

    Warrants

    Learn more about this derivative security.
  8. Financial Advisor

    SEC Derivatives Rule May Limit Diversification

    The SEC has proposed rules that will limit the use of derivatives by fund managers. Critics believe the rules will impede funds' ability to diversify.
  9. Investing

    Can Amazon Sink Ocean Freight Competitors?

    The only question is, how long will it take Amazon to put the ocean freight market in a tailspin.
  10. Markets

    Looking to Invest in Oil Tankers? Try These 3 Stocks (NAT, SFL)

    Obtain information on the oil shipping industry, and discover three of the most widely traded oil tanker stocks to obtain exposure to oil shipping.
RELATED FAQS
  1. Why is a Free on Board (FOB) designation important for freight transportation?

    Find out more about free on board destination, the variations of FOB destination and why FOB destination is important for ... Read Answer >>
  2. What is the difference between cost and freight (CFR) and cost, insurance and freight ...

    Find out about the difference between cost and freight and cost, insurance and freight, two commonly used international trade ... Read Answer >>
  3. What expiry months are typically available for derivatives?

    Discover more about the derivatives market and learn about the varying expiration months for derivatives in different financial ... Read Answer >>
  4. How big is the derivatives market?

    Examine the potential size of the total derivatives market, and learn how different calculations can reduce the estimate ... Read Answer >>
  5. Can mutual funds invest in derivatives?

    Find out about mutual fund investment options, and understand whether mutual funds are permitted to include investments in ... Read Answer >>
  6. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Answer >>
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  3. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  5. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  6. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
Trading Center