Download What is a Freight Forward?

Portfolio Management of
Tanker Freight Risk
Intertanko’s Rotterdam Tanker Event
Monday 15th April 2002
Jim Gretton – Global Freight Forwards
What some Owners do
Acquire ships
Sell Ships
Fill intervening time as best as can
- take period cover if cash flow dictates and a T/C is available
- might do some contract business
- take spot market wherever ship happens to be
For all period business, tomorrow is higher
than today
Alternative Trading Method –
Portfolio Management
For each forward time period, assess freight longs/shorts
–
–
–
–
LONG means you benefit if rates go UP (eg Owning a ship)
SHORT means you benefit if rates go DOWN (eg having T/Chartered out)
match by period (eg Month), vessel size (eg VLCC), region (eg AG)
net off longs against shorts to determine your net position
Assess your opinion of forward markets
– forecast state of global economy
– forecasts of likely oil demand (eg EIA, OPEC)
– market sentiment
Match your forward position with your forward opinion
– are you happy?
– if not, FIX IT!
– can still Time Charter (out or in) or do Contracts, but also FFAs
What is a Freight Forward Agreement?
Can be ‘Over-the Counter’ agreement or
traded on an Exchange via a screen
‘Contract for Differences’ (CFD) – means cash
settlement
Uses a specified notional voyage
Fixes a price today for a defined future period
Position closed out against an Index or Broker
assessment over the defined future period
FFA Compared to Time Charter
Pros
No physical performance risk
More liquid than Time Charter
With standard terms, quick to do
Flexible volumes, regions and selective timings
Keeps control of your physical assets
Cons
May not get perfect match with desired
voyage/timing
Can have bunker price exposure (unless hedged)
Baltic International Tanker Routes
TD1, 280kt AG – US Gulf
TD2, 260kt AG – Singapore
TD3, 250kt AG – Japan
TD4, 260kt W Africa – USG
TD5, 130kt W Africa – USAC
TD6, 130kt cross Med
TD7, 80kt, cross N.Sea
TD8, 80kt, AG-Singapore
TD9, 70kt, Caribs – USG
TD10, 50kt, Caribs – USAC
TC1, 75kt
TC2, 33kt
TC3, 30kt
TC4, 30kt
clean, AG – Japan
clean, UKC – USAC
clean, Caribs – USAC
clean, Sing - Japan
Using FFAs to Adjust the Portfolio
Identify period/region of concern
Translate exposure into tonnes/month on
appropriate BITR route
Compare your opinion of forward rates with
available bids/offers in the FFA market
If FFA numbers are better than your own
view, trade
REVIEW REGULARLY!
100
0
Mar-03
Feb-03
Jan-03
Dec-02
Nov-02
Oct-02
Sep-02
Aug-02
Jul-02
Jun-02
May-02
Apr-02
Mar-02
Feb-02
Jan-02
-800
Dec-01
-700
Nov-01
-600
Oct-01
-500
Sep-01
-400
Aug-01
-300
Jul-01
-200
3 VLs Long
Term Cargo Shorts
Net Position
-100
Monthly kiloTonnes Exposure
Eastco VLCC Exposure, AG-Japan
600
500
400
300
200
3-Apr-02
27-Mar-02
20-Mar-02
13-Mar-02
6-Mar-02
27-Feb-02
20-Feb-02
13-Feb-02
6-Feb-02
30-Jan-02
23-Jan-02
16-Jan-02
9-Jan-02
2-Jan-02
WS Points
250kt AG-Japan, Spot Market
60
50
40
30
Spot Market
20
10
0
3-Apr-02
27-Mar-02
20-Mar-02
13-Mar-02
6-Mar-02
27-Feb-02
20-Feb-02
13-Feb-02
6-Feb-02
30-Jan-02
23-Jan-02
16-Jan-02
9-Jan-02
2-Jan-02
WS Points
250kt AG-Japan, Spot Market and 3rd Quarter Forward Market
60
50
40
30
Spot Market
3Q02 Bid
3Q02 Offer
20
10
0
Amended Eastco VLCC Exposure, AG-Japan
600
500
400
300
100
0
Mar-03
Feb-03
Jan-03
Dec-02
Nov-02
Oct-02
Sep-02
Aug-02
Jul-02
Jun-02
May-02
Apr-02
Mar-02
-800
Feb-02
-700
Jan-02
-600
Dec-01
-500
Nov-01
-400
Oct-01
-300
Sep-01
-200
Aug-01
-100
Jul-01
Monthly kiloTonnes Exposure
200
3 VLs Long
Term Cargo Shorts
FFA Sale
Revised Position
Systems & Controls
Need for review means that all physical freight
deals must be entered in an exposure system
Must ensure all FFAs are entered promptly
Should value all paper deals on a ‘mark-tomarket’ basis daily
Report on on-going counter-party exposure
Control on max outstanding at any one time