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In what could be a significant shift in air freight, forwarders will be able to manage their exposure to the volatile market, and get better prices, from derivatives trading.
Freight Investor Services (FIS) launched an Air Freight Forward Agreement (AFFA) market last month, and has seen several industry players use futures to hedge their forward exposure to price movements, using the TAC Index as the base.
“The August contract has seen the China & Hong Kong to Europe basket trade at $2.50/kg against the TAC Index, as top 10 freight forwarders and commodity funds traded bilaterally,” noted Freight Investor Services.
“The trade offers support against weakening cargo revenue and profitability during an expectedly poor low season, whilst mitigating week-on-week rate volatility.”
FIS said the new market used the power and flexibility of financial contracts to manage profitability.
It explained: “An AFFA is a cash-settled derivative contract with no physical delivery. It is used to hedge against adverse price movements and is taken out inversely to physical positions, or on a speculative basis to cover spot requirements.
“In a hedging application, the AFFA is designed to balance cashflow between physical and paper positions and return a positive position at the end of the overall contract.”
FIS published the first air freight forward price curve in July 2018, after spending a year on its development, in tandem with the TAC Index.
More to follow on this new development