Freight forwarders use air cargo derivatives against low season turbulence

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Leading freight forwarders have moved into derivatives trading this summer to combat the turbulent air freight spot market. Since the launch of the Air Freight Forward Agreement (AFFA) market this summer by UK-based Freight Investor Services (FIS), several leading players have used futures to hedge their forward exposure to future price movements.

The August contract has seen the China & Hong Kong to Europe basket trade at $2.50/kg against the TAC Index as top ten freight forwarders and commodity funds traded bilaterally.

The trade offers support against weakening cargo revenue and profitability during an expectedly poor low season, whilst mitigating week-on-week rate volatility. The trades represent enterprising moves by key market participants into the financial space, utilising the power and flexibility of financial contracts to manage profitability for physical airfreight businesses.

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 ever air freight forward price curve in July 2018, opening a new era of risk management in the $100bn global airfreight market (source; Boeing World Air Cargo Forecast 2018). The brokerage spent 12 months working with index provider TAC Index to develop a robust methodology for air freight.

As the global leader in freight and commodity futures, FIS works across the transport industry to help users manage the market’s inherent volatility. Using an AFFA, freight forwarders will be able to manage their exposure and obtain better pricing. Asset owners leasing planes to carriers can use AFFAs to manage their forward income stream, working with lessors to hedge their risk by locking in forward cover.