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Freight Swap
Freight Swap
Establishing the price of tomorrow's commodities today.
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Product features
A swap is a contract in which two counterparties undertake to make reciprocal periodic payments whose calculation rules and frequency are defined in the contract. Such product is used in order to set the price of the underlying in advance: the buyer and the seller agree to exchange future payments periodically. The first one pays a fixed price while the second one pays a variable price which depends on the market price of the underlying.
There is no physical exchange of the underlying, in fact only cash flows deriving from the difference between the fixed price and the variable price are exchanged.
This instrument allows to manage the price risk in the energy markets. In the case of coal, swaps can be used to reduce risk in the event of a rise in the market (for a producer) or in the event of a fall (for a shipper).
The available indexes for this kind of financial instrument - which are published by Baltic Exchange - are listed here below, however also different alternatives could be envisaged if needed.
Capesize:
Route C4 - Richards Bay -Rotterdam, expressed in USD/t, being goods by cargo volume.
Route C7 - Port of Bolivar - Rotterdam, expressed in USD/t, being goods by cargo volume.
Timecharter averages- Average of Cape routes, expressed in USD/t, being goods by cargo volume.
Panamax:
Timecharter averages- Average of Panamax routes, expressed in USD/t, being goods by cargo volume.
Safety
The future price of the commodity is set today.
No immediate disbursement
No need to pay immediately: the initial value of the contract is 0.
Price risk coverage
Reduced exposure to market price.
Graphic Illustration
The following graphs show the value of a swap contract for different levels of the underlying. In the event of a purchase, the contract has a higher value as the price of the underlying market increases. If, for example, a purchase contract was signed for the month of May at a price of 10 USD/t, as the market price increases, there will be a greater gain deriving from the signing of the contract. On the contrary, in cases of price reduction, there will be a loss proportional to the difference between the market price and the purchase price.
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In the event of sale, the contract has a higher value as the price of the underlying market decreases. If, for example, a sale contract was signed for the month of May at a price of 10 USD/t, as the market price decreases, there will be a greater gain deriving from the signing of the contract. On the contrary, in cases of price increases, there will be a loss proportional to the difference between the market price and the selling price.
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