Complete Guide To Container Freight Derivatives

Complete Guide to Container Freight
Derivatives
Clarkson Securities Limited
Contents
Section 1 Introduction to Container Fundamentals
Section 2 Introduction to Derivatives
Section 3 Introduction to the SCFI
Section 4 Introduction to Clearing
Section 5 Introduction to Swaps
Section 6 Introduction to Options
Section 7 Introduction to Hedging with Swaps
Section 8 Introduction to Index-Linked Service Contracts
Section 9 Introduction to Hedging an Index-Linked Service Contract
.
Section 1
An Introduction to Container Fundamentals

World Container Trade

Global Box Trade 1996-2010
m TEU
Trade
Growth %
growth
160
20%
140
15%
120
10%
100
80
5%
60
0%
40
-5%
20
0
-10%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009 (e)
2010 (e)
2011 (f)
The period 1997-2008 saw average growth

in container trade of 9% per annum, with 6
years of consecutive double-digit growth
2002-2007.
Growth slowed in 2008 to 4.3% from 11.4%
in 2007 following the impact of unpredicted
changes in world economic and financial
conditions.
With the global economic crisis biting hard,
2009 witnessed an estimated 9.0%
contraction in global container trade to
124m TEU.
Recovery in volumes on a wide range of
trades in 2010 led to estimated growth in
global terms of more than 12.9% in the full
year to 140m TEU, with current projection
of 9.2% growth in 2011.
Source : Clarkson Research Services
Global Demand Projection
Mainline Trades; through the years

Asia - US E/B container trade
60%
50%
Asia-Eur W/B container trade
% change yoy
40%
30%
20%
10%
0%
-10%
-20%
-30%
Source : CRSL, PIERS, FEFC, ELAA, CTS
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
-40%
Supply; Container Capable Capacity

Global Container Capacity
16.3 million TEU of container

capable capacity on liner vessels
at the start of 2011.
m TEU, start
18.0
year
16.0
Other
MPP
Containership
14.0
14.1 million TEU of this provided

by fully cellular containerships.
12.0
Todays fleet dominated by fully

cellular containership capacity;
other container capable supply
playing a diminishing role.
10.0
8.0
6.0
4.0
2.0
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.0
Container capacity on order also

dominated by fully cellular
containership capacity.
Containership Orderbook
The total containership orderbook that
remains at start of June 2011 is still
large, with 4.1 million TEU on order equivalent to 27.7% of existing
containership capacity the 10,000+
TEU orderbook numbers 144 vessels
of a combined 1.9m TEU, equivalent
to 165% of the 10,000+ TEU fleet.
Includes 1.1 million TEU scheduled
for delivery in the remainder of 2011
and 1.5 million TEU for 2012 delivery.
However, the containership orderbook
has been subject to significant
erosion as well as delivery slippage.
Containership Orderbook
2.00
m TEU
100-999 TEU
1000-2999 TEU
3000-7999 TEU
8000+ TEU
No. of ships
1.75
1.50
1.25
no.
250
200
150
1.00
100
0.75
0.50
50
0.25
0.00
0
2011
2012
2013
2014+
Carrier Capacities;
growth June 2010 June 2011
May deliveries: approx 130,000 TEU
Jan Jun 11: approx 625,000 TEU
Average size to date: just under 7,000
TEU
Average size 2010: approx 5,250 TEU
Source: ASX
Orderbook Imbalance
Containership Orderbook As % Of Existing Fleet
100%
90%
80%
70%
60%
251 ships
50%
2.8m TEU
40%
30%
20%
10%
0%
100-999 TEU
1000-2999 TEU
3000-7999 TEU
8000+ TEU
Slippage & Cancellation; Overview

Scheduled vs Actual Deliveries 2009-10
000 TEU
2500
Scheduled
Graph shows scheduled vs actual

deliveries.
Actual
Non-delivery of 45% in 2009.

Final figures for 2010 estimate at
around 40%.
2000
This factor has made a huge difference

to the supply side of the container
shipping industry compared with original
expectations.
1500
1000
Ytd 2011 non-delivery currently running

at c.30%.
500
0
2009
2010
2011 ytd
Cascading Trends
% of TEU Deployed
8k+ TEU share of Transpac.
80%
3-8k TEU share of North-South

70%
1-3k TEU share of Intra-Regional
60%
50%
40%
30%
20%
10%
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
0%
How Much Slow Steaming Today?

Transpacific Services, Q1 2011
16
14
12
no. of
services
no. of 10
services
8
6
4
2
+3 ships
+2 ships
+1 ship
standard
+3 ships
18
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
+2 ships
20
traditional USWC service of 5 ships;

USEC service 8 ships
+1 ship
traditional service of 8 ships
standard
Far East-Europe Services, Q1 2011
Idle Boxship Capacity

Idle Containership Development
no ships
600
550
m.TEU
Charter owner
1.4
500
450 Operator
400
1.2
1.0
350
300
0.8
250
0.6
200
150
100
1.6
no. of ships
0.4
Million TEU idle

0.2
50
0
0.0
Oct-08
Dec-08
Feb-09
Mar-09
Apr-09
Jun-09
Aug-09
Sep-09
Nov-09
Dec-09
Feb-10
Mar-10
Apr-10
Jun-10
Jul-10
Sep-10
Nov-10
Jan-11
Feb-11
Having built up dramatically in 2008 and

2009, in 2010 the majority of the idle
fleet was returned to service.
Idle capacity fell from near to 600 ships /
1.51 m TEU to around 150 ships in
December 2010, moving from 11% to
less than 3% of the fleet.
Currently less than 1% of the fleet
remains idle.
As of June 2011 only 63 ships/80,000
TEU are idling - all less than 3,300 TEU
capacity
Source : Clarkson Research/AXS
Section 2
An introduction to derivatives and hedging

Derivatives; a brief history

The use of derivatives has been around for centuries with its origins found in
commodities, farming and agriculture.
Futures/Forwards developed around producers of commodities and goods looking to
hedge prices for their wares and remove their exposure to the volatility associated with
supply and demand market characteristics.
Trading became more sophisticated with the introduction of exchanges, in 1710 the
Dojima Rice Exchange transformed Japan bringing the conversion from rice to coin as
currency. Later, in 1848 the Chicago Board of Trade was established and became the
worlds oldest Futures and Options Exchange.
The later 20th and 21st Century saw enormous growth in the derivatives markets
worldwide with a multitude of products and markets that are traded through exchanges,
dealers, brokers, screens and online.
Derivative; A security whose price is dependent upon or derived from one

or more underlying assets
Derivative is a generic term for a number of different contracts, the three most common
being:
Futures/Forwards An agreement to buy or sell a specified quantity, at a specified

future date, at a price agreed today. The difference being that futures are exchange
traded, whilst forwards are traded directly between two parties (OTC Over the Counter,)
with more flexibility.
Options Gives the Buyer (Holder) the right but not the obligation, to buy or sell an
asset at a specified time in the future. The Holder pays the Seller (Writer,) a premium for
having this option (right.)
Swaps The exchange of floating for fixed cashflows at a specified time in the future, at
a price agreed today, based on the value of the underlying,
Derivatives; the Long and the Short of it

When talking about our relationship with the underlying asset it is defined as either
Long: we own the underlying asset, and our risk is of prices falling
Short: we want to own the underlying asset, and our risk is of prices rising
The position we take in derivatives to hedge is the opposite (in nearly all cases) of the
one held in the underlying asset
Long underlying (Carrier has capacity) = Short hedge (sells to get offset if prices fall)
Short underlying (3PL wants capacity) = Long hedge (buys to get offset if prices rise)
Volatility; tending to be subject to large price fluctuations

The Container Freight Market is subject to volatility, and in recent years this has been on
an unprecedented scale.
According to SCFI Data, the USD Per TEU rate on the EUR Route rose from $353 in
March 2009 to $2,164 in March 2010, an increase of 613%.
Since March 2010 it has fallen from $2,164 to $1,342 in January 2011, a decrease of
62%
Hedging; a strategy designed to offset or reduce the effect of price
Profit
fluctuations in an asset.
A farmer (long underlying) sows his wheat

crop, after production costs his break-even
is $100/ton.
10
90
100
110
Price
Loss
10
Any price above $100/ton will generate a

profit and any price below $100/ton will
generate a loss.
He is currently at the mercy of the market
for the eventual sale price of his wheat.
Profit
To hedge his exposure to wheat prices the

farmer looks to the futures market .
10
90
100
The Farmer (long underlying) can sell

(short) wheat futures at $110/ton.
110
Price
Loss
10
Any price below $110/ton will generate a

profit and any price above $110/ton will
generate a loss.

Profit
Combining his long underlying @ $100/ton

and short future position @ $110/ton,
shows he has secured a $10/ton profit on
the wheat he produces.
10
90
100
110
Price
Loss
10
If the price of wheat falls to $90/ton, he will

lose $10/ton on his production cost but gain
$20/ton on his future position, keeping his
net profit of $10/ton.
If the price of wheat rises to $120/ton, he
will make $20 on his production cost and
lose $10/ton on his future position, keeping
his net profit of $10/ton.
Section 3
The Shanghai Containerised Freight Index

SCFI; Shanghai Containerised Freight Index
The SCFI is a weekly index produced by the Shanghai Shipping Exchange (SSE)
covering covers 15 major tradelanes ex Shanghai, each of which is given a weighting in
order to calculate the Comprehensive Index.
Each route is given a USD rate per TEU or FEU depending on the particular trade.
It is representative of the current CY/CY cost of exporting one TEU (or FEU) of general
cargo and includes: OFR, BAF/FAF, EBS/EBA, CAF/YAS, PSS, WRS, PCS, SCS/SCF,
PTF/PCC.
The Ocean Freight (OFR) portion will always be prepaid. The Surcharges may be prepaid
or collect.
SCFI; Shanghai Containerised Freight Index

3000
15 route assessments given in USD per

box format.
2500
2000
1500
FE-Eur, $/TEU
1000
Transpac., $/FEU
The unique Supply and Demand panel

structure gives the SCFI balance and
neutrality.
It is independently audited by KPMG.
FE-S.Am, $/TEU
500
ar
A -0 9
pr
M -09
ay
Ju 0 9
l
A 09
ug
Se - 0 9
p
O -09
ct
N -09
ov
D -09
ec
Fe -09
b
M -1 0
ar
A -1 0
pr
Ju -10
nJu 1 0
A l-10
ug
Se - 1 0
p
O -10
ct
N -10
ov
D -10
ec
-1
0
It is in essence a spot market barometer

allowing the physical market to
benchmark their contracts and assess
the market potential.
SCFI Panellists; Carriers

CMA-CGM
K-Line
COSCO
Maersk Line
CSCL
MOL
Hanjin
NYK
HASCO
OOCL
Hapag Lloyd
PIL
Jin Jiang
Sinotrans
SITC
SCFI Panellists; Non-Carriers

Orient Intl Logistics
Viewtrans
UBI Logistics
Richhood Intl
JHJ Intl Transport
Ever-leading Intl
SIPG Logistics Co
ADP Logistics
Orient Express Intl
Sunshine-Quick Group
Huaxing Intl
COSCO Logistics
Shanghai Jinchang
Sinotrans Eastern Co Ltd
Shangtex
SCFI; Why do we need an index?
In an opaque market a neutral index allows Shippers, 3PLs and Carriers to benchmark
their performance so even if you are not shipping spot, the SCFI can show you how your
contract rate compares.
The spot market can give a valuable indication of where rates might be headed
particularly when combined with forward freight rates from ClarksonBoxClever.
An index also allows the development of Index-Linked Service Contracts (ILSCs), where
freight rates are pegged against the SCFI.
Section 4
An introduction to clearing
The Clearing House
Clearing houses perform a vital role within derivatives markets, both for exchange and
OTC traded products. Acting as a central counterparty to trades, the clearing house
assumes the counterparty risk for trades and their settlement.
Trading on a cleared basis has become much more prevalent in freight markets following
the financial crisis and the effects which it had on the drybulk market. Today sees the
overwhelming majority of freight derivative trading take place on a cleared bas
Minimising Risk
The clearing house, acting as a central counterparty, guarantees the settlement of traded
positions in the event of default by one of the parties to the trade.
It uses a system of margining requirements, position offsetting/netting and contains
sufficient residual capital so that it can meet its obligations in the event of a default or
market crash.
The two types of Margin are
Depository Margin An amount of cash placed with the clearing house when a trade is
executed, based on the nominal value of the trade which is refundable on settlement.
Variation Margin This is cash which is either paid to or received from the clearing house
on a daily basis. Your trading position is marked against the current market to determine
if it is in profit or loss and accordingly you will either pay or receive cash. In this way
settlement is also effected during the active tenor of your trade.
LCH Clearnet and SGX AsiaClear

There are two clearing houses which offer clearing for CFSA contracts, LCH Clearnet in
London and SGX AsiaClear in Singapore.
www.lchclearnet.com
www.sgx.com
How to get cleared?
In order to place trades with a clearing house it is necessary to open an account with
General Clearing Member (GCM).
The GCM is a financial institution which manages and administers margin requirements
for its clients.
Each clearing house has a specified list of GCMs which are authorised to enter their
clients business into the clearing house and these are available on the clearing houses
webpage.
Section 5
An introduction to swaps
Swaps; the exchange of cash-flows
A swap contract provides buyers and sellers the opportunity to exchange fixed for floating
cash flows.
In Container Freight Swap Agreements (CFSAs) the Buyer and Seller agree a Contract
Price which is fixed and receive a floating price through the settlement of the contract.
They then offset the cash received or paid through the settlement against their physical
freight position to level up their overall profit and loss.
The bottom line; back to basics

The position we take in options to hedge is the opposite of the one held in the underlying
asset
Long underlying = Short hedge (sells to get offset if prices fall)
Short underlying = Long hedge (buys to get offset if prices rise)
The mechanics; what makes a Container Freight Swap Agreement

(CFSA)
Contact Price: The price agreed between Buyer and Seller. The Buyer believes it will be
above this value, while the seller believes it will be below.
Route: CFSAs are traded against the Routes which the SCFI Index reports freight data
on.
Contract Period: The period over which the CFSA is settled, with the minimum being one
month.
Volume: CFSAs are traded for a specified volume of TEU or FEU per Month.
Settlement: CFSAs are settled against the monthly average of the relevant SCFI Route.
Swaps; how it works

To hedge against freight rates rising, we can buy a CFSA contract, we will use the gain
made on our swap contract to offset the higher physical spot price of freight. With an
agreed contract price of $1,650/TEU we can see the profit/loss below.
Profit
We can see that the maximum

theoretical loss this position can
sustain, is $1,650 (if it fell to 0.) The
maximum theoretical profit this
position can make is unlimited.
50
1550
1600
1650
1700
Price
Loss
50
The settlement works such that, for

every $1 decline, the position will
lose $1, and for every $1 rise, the
position will make $1.
Swaps; how it works

To hedge against freight rates falling, we can sell a CFSA contract, we will use the gain
made on our swap contract to offset the decreased revenue from the lower spot price of
freight. With an agreed contract price of $1,650/TEU we can see the profit/loss below.
Profit
We can see that the maximum

theoretical loss this position can
sustain is unlimited. The maximum
theoretical profit this position can
make is $1,650 (if it fell to 0.)
50
1550
1600
1650
1700
Price
Loss
50
The settlement works such that, for

every $1 decline the position will
make $1, and for every $1 rise, the
position will lose $1.
.
Section 6
An introduction to options
Options; the right but not the obligation

An option provides the buyer with the right, but not the obligation, to buy or sell an asset
or product when certain criteria and market conditions have been met.
There is a price to pay for having this right, the premium, which is payable to the seller
that grants the option.
Options are very much like insurance, a premium is paid, so that should an event occur,
the buyer of the policy is re-compensated by the seller.
The bottom line; back to basics

The position we take in options to hedge is the opposite of the one held in the underlying
asset
Long underlying = Short hedge (sells to get offset if prices fall)
Short underlying = Long hedge (buys to get offset if prices rise)
Calls and Puts; the two types of option

Some may wish to protect again the market rising, whilst others may wish to protect
against the market falling.
A quick recap: Buyers benefit from a rising market / Sellers benefit from a falling market.
Call Options: Gives the buyer the right, but not the obligation to buy an asset.
Put Options: Gives the buyer the right, but not the obligation to sell an asset.
The mechanics; what makes an option

Container Freight options share many similarities with a CFSA contract such as Volume,
Route, Settlement. Below however are the characteristics which make them different.
Strike Price: The price agreed between Buyer and Seller, upon the assets value reaching
this point, the option can be exercised (depending on the exercise conditions, see
below.)
Exercise Type: Defines when, and how the Option is exercisable. Container Freight
options are Asian the strike price is determined using an average of the asset value
over the contracted period, with the Option being automatically exercised if it settles
above (Call Option) or below (Put Options) the strike price.
Premium: The premium is the price payable by the buyer, to the seller. The premium is
calculated using a pricing model. In Container Freight Options this takes the form of a
USD per TEU/FEU format i.e $15 per TEU.
Options; the benefits
Flexibility By being able to choose which strike price is best fitted to manage each risk
accordingly, there are opportunities that can be gained which are not available in the
swaps market.
Risk As a buyer of options, the only capital placed at risk is the premium that is paid to
the seller, should the strike price not be reached and your option remain un-exercised,
then the most you can ever lose is the premium.
This means you can create floors or ceilings for container freight prices, at a level which
is appropriate to your needs with the only, at risk capital, being that of the premium.
Call Options; how it works
Profit
To hedge against freight rates rising, we can buy a Call Option (which gives us the right,
but not the obligation to buy.) With a Strike Price of $1,600 and a Premium payable to the
Seller of $50/TEU, the profit/loss is displayed below.
50
1550
1600
1650
1700
Price
Loss
50
We can see that the maximum loss

sustained from this strategy is the
$50/TEU Premium that we pay the
Seller. Once the Contract settles
we receive a pay out from our
options position on any rate above
$1,600 In order to return a profit
we must also recoup the capital
spent on the Premium, so our
break even is $1,650, with anything
above being profit.
Put Options; how it works
Profit
To hedge against freight rates falling, we can buy a Put Option (which gives us the right,
but not the obligation to sell.) With a Strike Price of $1,650 and a Premium payable to the
Seller of $50/TEU, the profit/loss is displayed below.
50
1550
1600
1650
1700
Price
Loss
50
We can see that the maximum loss

sustained from this strategy is the
$50/TEU Premium that we pay the
Seller. Once the Contract settles
we receive a pay out from our
options position on any rate below
$1,650 In order to return a profit
we must also recoup the capital
spent on the Premium, so our
break even is $1,600, with anything
below being profit.
Section 7
An introduction to hedging with swaps

Hedging with swaps; an example
We will now take a look at how to construct a hedge position using a swap contract; first
from the perspective of a buyer and then a seller of ocean freight.
Buyers of ocean freight face the risk that this cost will rise. To mitigate this risk they will
hedge using a long position, that is they will buy a swap contract.
Sellers of ocean freight face the risk that their revenue will fall. To mitigate this risk they
will hedge using a short position, that is they will sell a swap contract.
The buyers hedge; an example

The buyer faces uncertainty regarding the potential for rises in freight cost during the
typical peak season of Q3.
Having budgeted for 12 months of freight cost with a premium weighted on the peak
season period, but being unable to fix their freight exposure, they remain at risk of
exceeding their costing and eating into their profit margins should freight rates rise above
their estimates.
To mitigate this risk they will hedge their Q3 position using a swap contract.
The background; planning and analysis
The buyer will import 500 TEU/Month during Q3 from China to the UK.
Their analysis of the market means that the budget for Q3 shipments is $1,500/TEU.
They will hedge 70% of their total volume during the Q3 period, 1,050 TEU, which
equates to 350 TEU/Month.
The remaining 30% of the volume will not be hedged so they can gain a small amount of
downside potential should rates not rise above their budget.
The Trade; managing the risk

The buyer calls Clarkson Securities Ltd. (CSL) to place an order to buy a Q3 contract on
the SCFI EUR Route for 350 TEU/Month.
CSL markets the buyers interest and finds a suitable counterparty for him to trade with.
A trade is then agreed as follows
Contract Route: SCFI EUR
Contract Period: Q3 2011 (July 2011/August 2011/September 2011)
Contract Price: US$ 1,500 / TEU
Volume: 350 TEU / Month
Settlement; the Buyers result
In order to settle the contract, the average of the SCFI EUR over the corresponding
month is used (this average is known as the Settlement Price) and then marked against
the Contract Price. If the Settlement Price is above the Contract Price, the buyer receives
the difference from the seller and vice-versa if it is below.
The sellers hedge; an example

The seller faces uncertainty regarding the potential for declining freight revenues during
the winter period of Q4.
Having forecast the potential supply/demand characteristics of the market and facing the
typical lull after the peak season, they remain at risk of freight revenue falling to the
extent that it would eat into their profit margins.
To mitigate this risk they will hedge their Q4 position using a swap contract.
The background; planning and analysis

The Seller has 9 vessels of 9,000 TEU, homogenous intake 7,200 TEU, on their Weekly
Asia/Europe Service during Q4.
They have 40% of each vessels capacity which is exposed to spot cargo and will hedge
80% of this capacity during the Q4 period. The remaining 20% of the capacity will not be
hedged so they can gain a small amount of upside potential should rates not fall below
their breakeven.
With 13 weeks in Q4, this means there will be 13 WB vessel sailings during that time.
13 x 7,200 TEU = 93,600 TEU
40% of 93,600 TEU = 37,440 TEU
80% of 37,440 TEU = 29,952 TEU
29,952 TEU / 3 (Months/Quarter) = 9,984 TEU / Month, rounded to 10,000 TEU
Their breakeven even return per TEU is $1,250 and they wish to try and secure a profit
margin on top of this figure.
The Trade; managing the risk

The seller calls Clarkson Securities Ltd. (CSL) to place an order to sell a Q4 contract on
the SCFI EUR Route for 10,000 TEU/Month.
CSL markets the sellers interest and finds a suitable counterparty for him to trade with.
A trade is then agreed as follows
Contract Route: SCFI EUR
Contract Period: Q4 2011 (October 2011/November 2011/December 2011)
Contract Price: US$ 1,400 / TEU
Volume: 10,000 TEU / Month
Settlement; the Sellers result
In order to settle the contract, the average of the SCFI EUR over the corresponding
month is used (this average is known as the Settlement Price,) and then marked against
the Contract Price. If the Settlement Price is below the Contract Price, the seller receives
the difference from the buyer and vice-versa if it is above.
Section 8
An introduction to Index-Linked Service

Contracts
Indexation; flexible pricing
One of the problems with typical container freight contracts is that they are designed to
offer no flexibility in pricing once they have been agreed.
This means they come under increasing stress the further the spot market moves away
from the contracted price. Carriers feel pressure to take higher paying spot cargo, or will
introduce additional surcharges in a rising market, while Shippers prefer to move their
cargo to another Carrier offering cheaper rates in a falling market.
The way to overcome this is to use a system of flexible pricing which pegs freight prices
to the prevailing market conditions and thus provides both sides with the opportunity to
benefit from market conditions which favour them.
A typical year; the ups and downs
Spot freight rate
Below is a diagram of a fairly typical year in container freight. The blue line represents the
fixed rate contract and the red arrow the stress which it faces as spot rates diverge
Time 1 year duration

Quarter 1
Quarter 2
Quarter 3
Quarter 4
Contract Stress; how & why
As seen on the previous page, fixed rate contracts come under pressure the more the
spot rate diverges from them.
With little to prevent either Carriers or Shippers taking advantage of the market conditions
despite their contracts, the stress of volatility is all it takes for the relationship to be
broken. It follows then, that the greater and more frequent the volatility, the greater and
more regularly this stress is felt with the resultant breakdown of contracts.
Whilst in a perfect world a fixed rate contract would offer stability, the reality is vastly
different, even contracts between big players in the market are often not worth the paper
they are written on.
Evolution; the ability to adapt
Price volatility is a result of markets which are driven by supply and demand
fundamentals.
The container shipping industry has seen changes recently to bring about greater
competition in the market, such as the removal of certain conferences.
Long-held ideas such as engaging in long-term fixed rate contracts are proving to be
unsuited to the new dynamics of the market.
With volatility here to stay and further anti-trust regulation being almost inevitable, index
linked pricing mechanisms represent an efficient and cohesive response to the changing
nature of the market
In practice; how it works using the SCFI
Carrier and Shipper enter into an Index Linked Service Contract for an agreed period.
Volume is committed for the agreed period, with a weekly volume entitlement being
specified, incorporating both a minimum and maximum volume.
Individual vessel volumes to be advised prior to sailing, as per Carrier guidelines.
The base freight level is all inand calculated from the relevant weekly SCFI Route(s), as
published by the SSE.
Freight is calculated with an agreed percentage variation, or an agreed discount /
premium, to the SCFI Route price.
Section 9
An introduction to hedging Index-Linked

Service Contracts
Hedge Positions; timing
Spot freight rate
Having agreed an Index Linked Service Contract (ILSC) both Shipper and Carrier are
now in a position to look at hedging against the parts of they year when the fundamentals
will not be in their favour. Shipper hedges are in red and Carrier hedges are in blue.
Time 1 year duration

Quarter 1
Quarter 2
Quarter 3
Quarter 4
Hedging tools; swaps and options
In order to create positions which either limit cost or secure revenue in conjunction with
an ILSC, Shippers and Carriers can use swaps or options.
Shippers need to protect against rates rising so they will either buy swap contracts or buy
call options (the right but not the obligation to buy,) for the appropriate period
Carriers need to protect against rates falling so they will either sell swap contracts or buy
put options (the right but not the obligation to sell,) for the appropriate period.
Shippers; a rising market (swaps)
The Shipper buys a swap contract

to cover Q1 (Jan/Feb/Mar) @
$1,000 / TEU.
1200
Jan settles below the level he

bought. He uses the cheaper spot
cost of Index-Linked freight to offset the swap loss.
1100
1000
Jan
Feb
Mar
Feb and Mar settle above the level

he bought. He uses the cash made
on the swap contract to off-set the
higher cost of Index-Linked freight.
Shippers; a rising market (options)
The Shipper buys a call option to

cover Q1 (Jan/Feb/Mar) @ $1,000 /
TEU Strike for $25 / TEU Premium.
1200
Jan settles below the level he

bought. He only loses the cost of
the premium whilst still getting
some benefit of the cheaper spot
cost of Index-Linked freight.
1100
1000
Jan
Feb
Mar
Feb and Mar settle above the level

he bought. He uses the cash made
on the call option to off-set the
higher cost of Index-Linked freight.
Carriers; a falling market (swaps)
The Carrier buys a swap contract to

cover Q3 (Oct/Nov/Dec) @ $1,200 /
TEU.
1200
Oct settles above the level he sold.

He uses the higher spot revenue of
Index-Linked freight to off-set the
swap loss.
1100
1000
Oct
Nov
Dec
Nov and Dec settle below the level

he sold. He uses the cash made on
the swap contract to off-set the
lower spot revenue of Index-Linked
freight.
Carriers; a falling market (options)
The Carrier buys a put option to

cover Q4 (Oct/Nov/Dec) @ $1,200 /
TEU Strike for $35 / TEU Premium
1200
Oct settles above the strike price.

He only loses the cost of the
premium whilst still getting some
benefit of the higher revenue of
Index-Linked freight.
1100
1000
Oct
Nov
Dec
Nov and Dec settle below the strike

price. He uses the cash made on
the put option to off-set the lower
revenue of Index-Linked freight.

St Magnus House, 3 Lower Thames Street, London, EC3R 6HE, United Kingdom
Tel: +44 (0) 207 334 3151 Email csl@clarksons.com
Benjamin Gibson
David Barnes
Nadia Mirza
Tel Direct: +44 (0) 207 334 4712
Tel Direct: +44 (0) 207 334 4821
Tel Direct: +44 (0) 207 334 5490
Email:
benjamin.gibson@clarksons.com
Email:
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Email:
nadia.mirza@clarksons.com
Mobile: +44 (0) 7920 454712
Mobile: +44 (0) 7920 454821
Mobile: +44 (0) 7771 395490
www.clarksonsecurities.com Bloomberg CLRK <GO> Twitter @FFAExperts
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AUTHORITY.
ANY RESEARCH AND/OR ANALYSIS CONTAINED IN THIS REPORT HAS BEEN PROCURED BY US AND
MAY HAVE BEEN USED BY US FOR OUR OWN PURPOSES AND HAS NOT BEEN PROCURED FOR THE
EXCLUSIVE BENEFIT OF CLIENTS. ANY INFORMATION SUPPLIED HEREWITH IS BELIEVED TO BE
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EMPLOYEES CANNOT ACCEPT LIABILITY FOR LOSS SUFFERED IN CONSEQUENCE OF RELIANCE ON
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Complete Guide To Container Freight Derivatives

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Complete Guide To Container Freight Derivatives

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Complete Guide to Container Freight

An Introduction to Container Fundamentals

World Container Trade

The period 1997-2008 saw average growth

Source : Clarkson Research Services

Global Demand Projection

Mainline Trades; through the years

Asia-Eur W/B container trade

Source : CRSL, PIERS, FEFC, ELAA, CTS

Supply; Container Capable Capacity

16.3 million TEU of container

14.1 million TEU of this provided

Todays fleet dominated by fully

Container capacity on order also

Source : Clarkson Research Services

Source : Clarkson Research Services

Slippage & Cancellation; Overview

Graph shows scheduled vs actual

Non-delivery of 45% in 2009.

This factor has made a huge difference

Ytd 2011 non-delivery currently running

3-8k TEU share of North-South

1-3k TEU share of Intra-Regional

Source : Clarkson Research Services

How Much Slow Steaming Today?

traditional USWC service of 5 ships;

traditional service of 8 ships

Far East-Europe Services, Q1 2011

Idle Boxship Capacity

Million TEU idle

Having built up dramatically in 2008 and

Source : Clarkson Research/AXS

An introduction to derivatives and hedging

Derivatives; a brief history

Derivative; A security whose price is dependent upon or derived from one

Futures/Forwards An agreement to buy or sell a specified quantity, at a specified

Derivatives; the Long and the Short of it

Volatility; tending to be subject to large price fluctuations

Hedging; a strategy designed to offset or reduce the effect of price

A farmer (long underlying) sows his wheat

Any price above $100/ton will generate a

Hedging; a strategy designed to offset or reduce the effect of price

To hedge his exposure to wheat prices the

The Farmer (long underlying) can sell

Any price below $110/ton will generate a

Hedging; a strategy designed to offset or reduce the effect of price

Combining his long underlying @ $100/ton

If the price of wheat falls to $90/ton, he will

The Shanghai Containerised Freight Index

SCFI; Shanghai Containerised Freight Index

SCFI; Shanghai Containerised Freight Index

15 route assessments given in USD per

The unique Supply and Demand panel

It is in essence a spot market barometer

SCFI Panellists; Carriers

SCFI Panellists; Non-Carriers

JHJ Intl Transport

Orient Express Intl

Sinotrans Eastern Co Ltd

SCFI; Why do we need an index?

The Clearing House

LCH Clearnet and SGX AsiaClear