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FFA Market Dynamics & Trading Strategies
September 2010
Presented to: FFABA Shanghai Forum
Presented by: Georgi Slavov | Head of Dry Freight & Basic Resources Research
-
ICAP Shipping International Limited 2008. All rights reserved. p. 2 ICAP Shipping International Limited 2010. All rights reserved. Source: The Baltic Exchange, ICAP Shipping
Short-term
Price-differentials and subsequent Arbitrage opportunities
Seasonality and Industry stocking/de-stocking cycles
Congestion and net fleet availability
Switches from short to longer haul trades
Short-term tonnage oversupply/undersupply in the main trading areas and subsequent arbitrage
opportunities
Longer-term
Fleet investment activity
Macroeconomic conditions
Mining, steel making and power generation investment
Global trade pattern changes
Comparative raw material cost domestic v. imported
Major dry bulk trading routes
Source: The Baltic Exchange, ICAP Shipping
Key fundamental market drivers
-
ICAP Shipping International Limited 2010. All rights reserved.
FFA market structure
-
ICAP Shipping International Limited 2008. All rights reserved. p. 4 ICAP Shipping International Limited 2010. All rights reserved.
Trader A enters into an agreement with Trader B to buy specific
contract on a pre-agreed price at
W135. The contract will settle at
the end of the pre-agreed period
against pre-agreed benchmark
The market moves in Trader A favor and at the end of the period
the settlement (average price for
the entire pre-agreed period) is
higher than the buying price, say
W139
Trader A therefore receives the difference of W4
The entire process involves only one transaction which is typical for
the OTC bilateral cash settled swaps
Cash settled swap trade mechanics
Source: Baltic Exchange, ICAP Shipping
Tra
de
r B
pa
ys
Tra
de
r A
Tra
de
r A
pa
ys
Tra
de
r B
120
125
130
135
140
145
150
155
160
165
01 Mar
10
05 Mar
10
09 Mar
10
13 Mar
10
17 Mar
10
21 Mar
10
25 Mar
10
29 Mar
10
Trade: Trader A sells fixed swap to Trader B at $135 pmt
Spot market (1-31 March 2010)
Settlement = $139 pmt
How do the swaps work?
-
ICAP Shipping International Limited 2008. All rights reserved. p. 5 ICAP Shipping International Limited 2010. All rights reserved.
Traded on a decentralized market with an important role played by the broker in the price discovery mechanism
Trades are done on the phone (voice broking) but it is just a question of time before screen trading gathers momentum
Two counterparties agree a price, taking opposing positions
If OTC, the settlement/payment is done within 5 business days after the settlement date of the contract
If Cleared, the clearing house monitors the exposure of the counter parties and constantly re-calculates the trading margin
With the increased interest for clearing and gradual establishment of
primary and secondary markets, the volumes will shift more and more
towards screen trading
Trader
A
CLEARING
HOUSEBroker A Broker B
Protected in case
Trader A defaults
Assumes
counterparty risk
Intermediary Intermediary
CLEARED OTC TRANSACTION
Trader
B
Trader A
Exposed to Trader B default
BILATERAL OTC TRANSACTION
Trader B
Exposed to Trader A default
Market dynamics
-
ICAP Shipping International Limited 2008. All rights reserved. p. 6 ICAP Shipping International Limited 2010. All rights reserved.
Traditional physical market risk management: COAs and/or
Period deals
In order to make hedging more efficient, the FFA contract has
been designed as a cash settled
swap based on the underlying
physical freight market
Therefore, their value depends on the underlying market
(physical)
No predictive value whatsoever
Initially pure OTC products as tailor made swaps, recently more
and more standardized with
clearing becoming more and
more popular
Therefore they are gradually evolving into futures contracts
VLCC physical 1y vs. synthetic 1y
Source: Baltic Exchange, ICAP Shipping
Cape physical 1y vs. synthetic 1y
Hedging or Speculation?
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
$55,000
$60,000
Ja
n 0
9
Ma
r 0
9
Ma
y 0
9
Ju
l 0
9
Se
p 0
9
No
v 0
9
Ja
n 1
0
Ma
r 1
0
Ma
y 1
0
Ju
l 1
0
$/dayVLCC Synthetic 1-yr TC
VLCC Physical 1-yr TC
Corr. 33%10000
15000
20000
25000
30000
35000
40000
45000
50000
Ju
l 0
9
Au
g 0
9
Se
p 0
9
Oc
t 0
9
No
v 0
9
De
c 0
9
Ja
n 1
0
Fe
b 1
0
Ma
r 1
0
Ap
r 1
0
Ma
y 1
0
Ju
n 1
0
Ju
l 1
0
$/day Cape 1y Physical T/C
Cape 1y Paper Synthetic
Corr. 78%
-
ICAP Shipping International Limited 2008. All rights reserved. p. 7 ICAP Shipping International Limited 2010. All rights reserved.
Traded on a decentralized market with an important role played by the broker in the price discovery mechanism
Trades are done either on the phone (voice broking) or on a screen (electronic trading)
Two counterparties agree a price, taking opposing positions
A trade RECAP is sent to both parties
Both parties sign a contract (FFABA, ISDA)
Agreed route
Date of settlement
Contract quantity
Contract rate
If OTC, the settlement/payment is done within 5 days after the settlement date of the contract
If Cleared, the clearing house monitors the exposure of the counter parties and constantly re-calculates the trading margin
ICAP Freight Trading Screen (Tanker FFA)
Source: ICAP Shipping
With the increased interest for clearing and gradual establishment of
primary and secondary markets, the volumes will shift more and more
towards screen trading
Market dynamics
-
ICAP Shipping International Limited 2008. All rights reserved. p. 8 ICAP Shipping International Limited 2010. All rights reserved.
Dry bulk FFA market Increasing threat of counterparty
risk inspired more participants to
seek cleared trading services
Major clearing houses involved in the process (LCH, NOS, SGX,
NYMEX)
LCH.Clearnet attracted the biggest market share of the Dry
FFA volumes
The contracts are futures style, subject to initial and variation
margining
Wet contracts are forward style subject to contingency margin
and are held at the original trade
priceThe easing of the current crisis may inspire more risk taking and OTC
trading once again. However, we believe that the transition process
towards a clearing mechanism is irreversible.
Source: ICAP Shipping, The Baltic Exchange
0
5
10
15
20
25
30
35
40
45
01/0
4/0
9
01/0
5/0
9
01/0
6/0
9
01/0
7/0
9
01/0
8/0
9
01/0
9/0
9
01/1
0/0
9
01/1
1/0
9
01/1
2/0
9
01/0
1/1
0
01/0
2/1
0
01/0
3/1
0
01/0
4/1
0
01/0
5/1
0
01/0
6/1
0
01/0
7/1
0
01/0
8/1
0
Mt '000
0
10
20
30
40
50
60
70
80
90
100
%
Cleared OTC Cleared as % of total
Tanker FFA market
0
10
20
30
40
50
60
70
80
90
100
09/0
7/2
007
26/1
1/2
007
14/0
4/2
008
01/0
9/2
008
26/0
1/2
009
15/0
6/2
009
09/1
1/2
009
06/0
4/2
010
23/0
8/2
010
#Lots '000
0
10
20
30
40
50
60
70
80
90
100
%
Cleared OTC Cleared as % of total
Cleared vs. OTC trading
-
ICAP Shipping International Limited 2010. All rights reserved.
FFA market trends
-
ICAP Shipping International Limited 2008. All rights reserved. p. 10 ICAP Shipping International Limited 2010. All rights reserved.
ShipownersNowadays there are few pure shipowners as most of the asset owners are also involved deeply in the time
charter market and aim to expand their activity by
taking in ships on time charter
Trading housesThose are predominantly the commodity trading houses. They typically specialized in certain
commodities, such as grain or coal but recently they
have tended to diversify into other markets as well
and create interesting arbitrage trades between the
different trade flows (grain, coal, petcoke, steel,
scrap, fertilizers).
End-users (oil majors, steel mills, utilities)In the past these companies used to consider the raw materials they need mainly as logistical
operation. Nowadays they are more and more
involved with trying to control the freight exposure
(buying FOB)
Financial institutions (banks, funds)These are the new entrants on the market. Some banks have already constructed (or are looking to
construct) significant portfolios of time chartered
vessels and COAs.
Dry Bulk FFA Market segmentation by participants
Tanker FFA Market segmentation by participants
Source: ICAP Shipping
Trading
30%
Owners
27%
Oil majors
13%
Financials
30%
Financials Oil majors Owners Trading
Utility/mining
6% Financials
24%
Owners
43%
Trading
27%
Financials Owners Trading Utility/mining
Market segmentation by participants
-
ICAP Shipping International Limited 2008. All rights reserved. p. 11 ICAP Shipping International Limited 2010. All rights reserved.
Derivative market volume has been growing exponentially in
recent years
The Dry FFA market is still bigger than the Tanker FFA market although the recent decline diminished the gap considerably
More mature futures markets have a 10:1, even 20:1 ratio between paper:physical volumes
This underlines the potential for further growth for both Dry and Wet FFA markets
Source: ICAP Shipping, The Baltic Exchange
FFA Market value (US$) linear scale
0
20
40
60
80
100
120
140
160
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
US$bn
DRY Trade value $bn WET Trade value $bn
Physical vs FFA Market value (Dry) Physical vs FFA Market value (Wet)
Year 2007 2008 2009
Physical $125b $130b $94b
FFA $135b $153b $25.7b
Year 2007 2008 2009
Physical $45b $60b $31b
FFA $7b $9b $4.5b
0.01
0.1
1
10
100
1000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
US$bn
DRY Trade value $bn WET Trade value $bn
FFA Market value (US$) log scale
Trading volume (US$)
-
ICAP Shipping International Limited 2008. All rights reserved. p. 12 ICAP Shipping International Limited 2010. All rights reserved.
Both markets have been hit hard by the financial crisis
As a result the volumes dropped significantly in Q4 08 Q1 09
There are certain signs of stabilization
We consider this a normal transitional period which will only
help the restructuring of the
market
Source: ICAP Shipping, The Baltic Exchange
Dry Bulk FFA Market Volume Tanker FFA Market Volume
0
100
200
300
400
500
600
700
Q1 08 Q3 08 Q1 09 Q3 09 Q1 10
mln Mt
CLEARED OTC
0
20
40
60
80
100
120
140
Q1 08 Q3 08 Q1 09 Q3 09 Q1 10
mln Mt
CLEARED OTC
Trading volume (Lots)
-
ICAP Shipping International Limited 2008. All rights reserved. p. 13 ICAP Shipping International Limited 2010. All rights reserved.
Trading the FFA market
-
ICAP Shipping International Limited 2008. All rights reserved. p. 14 ICAP Shipping International Limited 2010. All rights reserved.
Fundamental Trading: Net Fleet Availability vs. Freight
Su
pp
ly in
cre
as
ing
Su
pp
ly d
ec
rea
sin
g
-6
-4
-2
0
2
4
6
8
10
12
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
Mln DWT
-500
500
1500
2500
3500
4500
5500
6500
7500
Points
Net Fleet Availability
BCI
-
ICAP Shipping International Limited 2008. All rights reserved. p. 15 ICAP Shipping International Limited 2010. All rights reserved. ICAP Shipping International Limited 2010
Fundamental Trading: Seasonality & Industrial Cycles
Figure 1. BDI Seasonality - Net frequency of positive months
since 1987Figure 3. Net Frequency of Month-on-Month Gains: Global
Coal Import Volumes versus BPI
Figure 4. Net Frequency of Month-on-Month Gains: Global
Grain Import Volumes versus BSI
-10
-5
0
5
10
15
20
Q1 Q2 Q3 Q4
-8
-6
-4
-2
0
2
4
BPI
Coal Trade Volume (rhs)
-4
-3
-2
-1
0
1
2
3
4
5
6
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
-15
-10
-5
0
5
10
15
BSI S.American Grain Exports (rhs)
-25
-20
-15
-10
-5
0
5
10
15
20
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
-10
-5
0
5
10
15
20
Q1 Q2 Q3 Q4
-10
-8
-6
-4
-2
0
2
4
6
8
10
BCI
Iron Ore Trade Volume (rhs)
Figure 2. Net Frequency of Month-on-Month Gains: Global Iron
Ore Import Volumes versus BCI
-
ICAP Shipping International Limited 2008. All rights reserved. p. 16 ICAP Shipping International Limited 2010. All rights reserved.
Fundamental Trading: FOB-CIF Price Arbitrage
With China the dominant driver, Capesize freight rates cannot increase
significantly until international prices fall or Chinese domestic prices rise
Iron ore market: FOB-CIF differentials
0
25
50
75
100
125
150
175
200
225
Jan
06
Apr
06
Jul
06
Oct
06
Jan
07
Apr
07
Jul
07
Oct
07
Jan
08
Apr
08
Jul
08
Oct
08
Jan
09
Apr
09
Jul
09
Oct
09
Jan
10
Apr
10
$/tonne
C3 - Brazil-China freight
Brazil FOB
Chinese domestic
Indian CFR
Contract FOB vs CIF at Chinese port
0
50
100
150
200
Apr
09
May 0
9
Jul 09
Aug 0
9
Sep 0
9
Nov 0
9
Dec 0
9
Feb 1
0
Mar
10
May 1
0
Jun 1
0
Aug 1
0
C3 (Tubarao-Beilun)
Brazilian FOB
Fe:65%Chinese Ex works
Fe:64%Indian CIF Fe:63.5%
-
ICAP Shipping International Limited 2008. All rights reserved. p. 17 ICAP Shipping International Limited 2010. All rights reserved.
Fundamental Trading: Tonnage Supply Arbitrage
With China the dominant driver, Capesize freight rates cannot increase
significantly until international prices fall or Chinese domestic prices rise
Pacific/Atlantic tonnage supply
0
40
80
120
160
200
240
280
320
Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10
Atlantic 1/40 days Pacific 1/40 days
Tonnage supply spread
0
0.4
0.8
1.2
1.6
2
2.4
2.8
3.2
3.6
4
4.4
4.8
5.2
5.6
6
Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10
Pacific / Atlantic tonnage supply
Tonnage Supply Spread
contract opened on 29.04.09 closed 19.05.09 $ Change % change
sell Pac 3A 10800 15236 -4436 -41.1
buy Atl 2A 18800 26879 8079 43.0
Net result (%): 12.31% 1.9
contract opened on 22.06.09 m-t-m 16.07.09 $ Change % change
sell Pac 3A 21321 20179 1142 5.4
buy Atl 2A 28386 33232 4846 17.1
Net result (%): 12.05% 22.4
contract opened on 23.10.09 m-t-m 26.10.09 $ Change % change
sell Pac 3A 20625 24279 -3654 -17.7
buy Atl 2A 29786 37375 7589 25.5
Net result (%): 7.81% 7.8
This concept involves careful tracking of the available tonnage for both
Atlantic and Pacific
Any imbalance will be reflected by wider than 1StDev move
The freight market should react on the changing supply and weaken in the
area where the supply is increasing
Trading results 1st Jan 2009 31 Dec 2009
-
ICAP Shipping International Limited 2008. All rights reserved. p. 18 ICAP Shipping International Limited 2010. All rights reserved.
Operator takes in Panamax vessel for 1 year at $14000/day
He hedges physical exposure by selling 1 year paper contract at
$16000/day
Difference between physical and paper is basis risk
Market drops below $14000 and therefore, the physical position is OTM
By hedging, the owner not only secures steady revenue, but also
locks in profit from the contango at the
time of the hedge
Revenue Hedged = 360 days x (monthly
settlement paper monthly settlement physical) = $720,000
Revenue Not Hedged = SUM(30 days x
monthly settlement physical for every month of
the period) = -$480,000
Had the operator not hedged, he would have been exposed to market
fluctuations and incur a loss of
$480,000
Scenario 1: paper in contango, market drops after we open long physical position
Date Long
physical
Short
paper
Monthly
settlement
monthly
settlement
physical
monthly
settlement
paper
Revenue
hedged
Revenue not
hedged
P/L
Hedged
(in $)
P/L Not
hedged
(in $)
Revenue
hedged
Revenue
Not
hedged
Dec09: execute 14000 16000
Jan 14000 16000 13500 -500 2500 16000 13500 60000 -15000
Feb 14000 16000 15500 1500 500 16000 15500 60000 45000
Mar 14000 16000 17500 3500 -1500 16000 17500 60000 105000
Apr 14000 16000 14500 500 1500 16000 14500 60000 15000
May 14000 16000 13000 -1000 3000 16000 13000 60000 -30000
Jun 14000 16000 11500 -2500 4500 16000 11500 60000 -75000
Jul 14000 16000 12500 -1500 3500 16000 12500 60000 -45000
Aug 14000 16000 13000 -1000 3000 16000 13000 60000 -30000
Sep 14000 16000 11500 -2500 4500 16000 11500 60000 -75000
Oct 14000 16000 11000 -3000 5000 16000 11000 60000 -90000
Nov 14000 16000 10500 -3500 5500 16000 10500 60000 -105000
Dec-10 14000 16000 8000 -6000 8000 16000 8000 60000 -180000 720000 -480000
Jan 14000 16000 8000 -6000 8000 16000 8000 60000 -180000
Feb 14000 16000 8000 -6000 8000 16000 8000 60000 -180000
Mar 14000 16000 8000 -6000 8000 16000 8000 60000 -180000
7000
9000
11000
13000
15000
17000
19000
Dec09:
execute
Feb Apr Jun Aug Oct Dec-10 Feb
Long physical Short paper Monthly settlement
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
Dec09:
execute
Mar Jun Sep Dec-10 Mar
Revenue hedged Revenue not hedged
Hedging Strategies
-
ICAP Shipping International Limited 2008. All rights reserved. p. 19 ICAP Shipping International Limited 2010. All rights reserved.
Operator takes in Panamax vessel for 1 year at $14000/day
He hedges physical exposure by selling 1 year paper contract at
$16000/day
Difference between physical and paper is basis risk
Market goes above $14000 and therefore, the physical position is well
ITM
By hedging, the owner reduced its profit potential on the physical
Revenue Hedged = 360 days x (monthly settlement
paper monthly settlement physical) = $720,000
Revenue Not Hedged = SUM(30 days x monthly
settlement physical for every month of the
period) = $1,365,000
Had the operator not hedged, he would have enjoyed healthy gains
through its physical position
Scenario 2: paper in contango, market goes up after we open long physical position
Date Long
physical
short
paper
Monthly
settlement
monthly
settlement
physical
monthly
settlement
paper
Revenue
hedged
Revenue not
hedged
P/L
Hedged
(in $)
P/L Not
hedged
(in $)
Revenue
hedged
Revenue
Not
hedged
Dec09: execute 14000 16000
Jan 14000 16000 14500 500 1500 16000 14500 60000 15000
Feb 14000 16000 13500 -500 2500 16000 13500 60000 -15000
Mar 14000 16000 15000 1000 1000 16000 15000 60000 30000
Apr 14000 16000 16000 2000 0 16000 16000 60000 60000
May 14000 16000 18000 4000 -2000 16000 18000 60000 120000
Jun 14000 16000 17000 3000 -1000 16000 17000 60000 90000
Jul 14000 16000 17500 3500 -1500 16000 17500 60000 105000
Aug 14000 16000 18500 4500 -2500 16000 18500 60000 135000
Sep 14000 16000 19000 5000 -3000 16000 19000 60000 150000
Oct 14000 16000 21000 7000 -5000 16000 21000 60000 210000
Nov 14000 16000 22500 8500 -6500 16000 22500 60000 255000
Dec-10 14000 16000 21000 7000 -5000 16000 21000 60000 210000 720000 1365000
Jan 14000 16000 21000 7000 -5000 16000 21000 60000 210000
Feb 14000 16000 21000 7000 -5000 16000 21000 60000 210000
Mar 14000 16000 21000 7000 -5000 16000 21000 60000 210000
10000
12000
14000
16000
18000
20000
22000
24000
Dec08:
execute
Mar Jun Sep Dec-09 Mar
Long physical Short paper Monthly settlement
0
5000
10000
15000
20000
25000
Dec08:
execute
Mar Jun Sep Dec-09 Mar
Revenue hedged Revenue not hedged
Hedging Strategies
-
ICAP Shipping International Limited 2008. All rights reserved. p. 20 ICAP Shipping International Limited 2010. All rights reserved.
Grain trader sold forward in December 70,000/10 soybean stem to China on
CIF basis with L/C at loading port 1/10
April
At that moment F/H Route 2A is trading at $34,000. Since there are
more than 3 months until the actual
shipment takes place the trader would
like to lock-in this price and exclude
the freight market volatility. He goes
Long R2A+4M contract at $34,000
In March it is finally time to arrange the actual physical delivery:
Case 1
F/H physical is trading at $39,000, R2A April is
trading at $40,000
The trader covers his Long position with +$6,000
per day profit which is then used to cover the
difference between the initial paper trade and the
actual physical trade
Case 2
F/H physical is trading at $24,000, R2A April is
trading at $23,500
The trader covers his Long with -$10,500 loss but
since he is able to fix the physical at $24,000 his
net result for F/H will be $34,500
15000
20000
25000
30000
35000
40000
45000
01 Dec 09 01 Jan 10 01 Feb 10 01 Mar 10 01 Apr 10
Physical F/H - scenario 1 R2A - scenario 1
R2A - Long hedge R2A - scenario 2
Physical F/H - scenario 2
Forward Hedging Scenarios
Hedging Strategies
-
ICAP Shipping International Limited 2008. All rights reserved. p. 21 ICAP Shipping International Limited 2010. All rights reserved.
Call option payoff diagram
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
62500 63000 63500 64000 64500 65000 65500 66000 66500 67000 67500 68000 68500 69000 69500
Holder's position
Writer's position
-40
-30
-20
-10
0
10
20
30
40
70 75 80 85 90 95 100 105 110 115 120 125 130 135 140
Holder's Position
Writer's position
Put option payoff diagramTD3 Buyer's Position Writer's position70 35 -35
75 30 -30
80 25 -25
85 20 -20
90 15 -15
95 10 -10
100 5 -5
105 0 0
110 -5 5
115 -10 10
120 -10 10
125 -10 10
130 -10 10
135 -10 10
140 -10 10
Cape +1Q Buyer's position Writer's position
62500 -1000 1000
63000 -1000 1000
63500 -1000 1000
64000 -1000 1000
64500 -1000 1000
65000 -1000 1000
65500 -500 500
66000 0 0
66500 500 -500
67000 1000 -1000
67500 1500 -1500
68000 2000 -2000
68500 2500 -2500
69000 3000 -3000
69500 3500 -3500
Strike @
$65000
Strike @
W115
Outright Freight Option Trading Strategies
-
ICAP Shipping International Limited 2008. All rights reserved. p. 22 ICAP Shipping International Limited 2010. All rights reserved.
Long Straddle payoff diagram Buy 1 July Call at $65,000 strike and $1,000
premium
Buy 1 July Put at $65,000 strike and $1,500 premium
Cost = Premium 1 + Premium 2 = $2,500
Therefore breakeven will be achieved when the market reaches $67,500 or $62,500
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
58000 60000 62000 64000 65500 68000 70000 72000
Long Call
Long Put
Underlying Long Call Long Put
58000 -1000 5500
59000 -1000 4500
60000 -1000 3500
61000 -1000 2500
62000 -1000 1500
63000 -1000 500
64000 -1000 -500
65000 0 -1500
65500 1000 -1500
67000 2000 -1500
68000 3000 -1500
69000 4000 -1500
70000 5000 -1500
71000 6000 -1500
72000 7000 -1500
Breakeven @
$62500 Breakeven @
$67500
Cost of the Straddle = Call + Put = $2,500
Direction-neutral Freight Option Trading Strategies
-
ICAP Shipping International Limited 2008. All rights reserved. p. 23 ICAP Shipping International Limited 2010. All rights reserved.
Structured deal payoff diagram
10000
11000
12000
13000
14000
15000
16000
17000
18000
19000
20000
21000
22000
23000
24000
25000
26000
27000
28000
29000
30000
01 Jan
10
01 Feb
10
01 Mar
10
01 Apr
10
01 May
10
01 Jun
10
01 Jul
10
01 Aug
10
01 Sep
10
01 Oct
10
01 Nov
10
01 Dec
10
Physical - Index Floor Hedge = Long Put
Physical Ceiling Physical Floor
Ceiling Hedge = Long Call
Shipowner decides to re-let his Supramax for 1 year on the basis of
the following structured index-linked
deal:
- Floor at $15,000
- Ceiling at $22,000
- Floating rate within those bands linked at 1.00
correlation to BPI 4T/C Routes Index
- Profit above the ceiling at 100% to the
Charterer
The owner is protected on the downside by the floor (subject to
Counterparty risk) but he would like to
have some upside potential in case
the market moves above $22,000
Therefore, he will be potential buyer of a Call option (Strike@22k, premium
$1,500 on 30%Vol)
Charterer will be aiming to protect himself in case the market drops
below $15,000 so he will be buying
protection (Long Put option,
Strike@$15,000, Premium $1,000,
30%Vol)
Structured Deals: Physical Market
-
ICAP Shipping International Limited 2008. All rights reserved. p. 24 ICAP Shipping International Limited 2010. All rights reserved.
Cape +1Q Contract ($/day)
0
4000
8000
12000
16000
20000
24000
28000
32000
36000
40000
44000
48000
52000
56000
60000
01 May 09 01 Jun 09 01 Jul 09 01 Aug 09 01 Sep 09 01 Oct 09 01 Nov 09 01 Dec 09 01 Jan 10
SMA (21)
-------- Bollinger bands (+/-2St.Dev)
SMA(55)
vital support/resistance
25000
30000
35000
40000
45000
50000
55000
60000
29
Dec
01
Jan
04
Jan
07
Jan
10
Jan
13
Jan
16
Jan
19
Jan
22
Jan
25
Jan
28
Jan
Outright trading is a bet on the direction of the market =
concentrated long or short
position
Fundamental trading
Technical trading
Mix between the two
Source: ICAP Shipping, The Baltic Exchange
Slow Stochastic
-50
0
50
100
150
Outright Trading Strategies
-
ICAP Shipping International Limited 2008. All rights reserved. p. 25 ICAP Shipping International Limited 2010. All rights reserved.
Intra-market arbitrage trading: same contract, different time
frame
Inter-market arbitrage trading: different contracts, same time
frame
Source: ICAP Shipping, The Baltic Exchange
Intra-market Arb
supramax +1Q / supramax +2Q
0.7
0.8
0.9
1
1.1
1.2
1.3
03 Jan 07 03 Jul 07 03 Jan 08 03 Jul 08 03 Jan 09 03 Jul 09 03 Jan 10
+2S t.De v.
me a n
- 2S t.De v.
short 13.01.10
cape +1Q / panamax +1Q
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
2.7
03 Jan 07 03 Jul 07 03 Jan 08 03 Jul 08 03 Jan 09 03 Jul 09 03 Jan 10
mean
+2S t.De v.
- 2S t.De v.
Inter-market Arb
Relative Value Trading Strategies
-
ICAP Shipping International Limited 2008. All rights reserved. p. 26 ICAP Shipping International Limited 2010. All rights reserved.
Algorithmic trading also known as Black Box Trading is only suitable for liquid markets which
allow execution with minimum
slippage
Source: ICAP Shipping, The Baltic Exchange
Algorithmic Trading Strategies
RATING
MOM vs LR SMA(13 ) SMA(2 1)
1 1 1
MOM vs LR SMA(3 4 ) SMA(5 5 )
1 1 1
MOM vs LR SMA(8 9 ) SMA(14 4 )
1 1 0
TOTAL RATING (0 - 9 ) 8
POSITION LONG
MEDIUM TERM
SHORT TERM
LONG TERM 2
3
FRONT QUARTER (CAPES)
3
RATING
MOM vs LR SMA(13 ) SMA(2 1)
1 1 1
MOM vs LR SMA(3 4 ) SMA(5 5 )
1 1 1
MOM vs LR SMA(8 9 ) SMA(14 4 )
1 1 1
TOTAL RATING (0 - 9 ) 9
POSITION LONG
SHORT TERM
MEDIUM TERM
LONG TERM 3
3
3
FRONT QUARTER (PANAMAX)
Front Quarter Capes
5000
15000
25000
35000
45000
55000
65000
Nov 08 Jan 09 Mar 09 May 09 Jul 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10 Jul 10
Front Quarter Panamax
5000
10000
15000
20000
25000
30000
35000
Nov 08 Jan 09 Mar 09 May 09 Jul 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10 Jul 10
-
ICAP Shipping International Limited 2010. All rights reserved.
Quo Vadis FFA market?
-
ICAP Shipping International Limited 2008. All rights reserved. p. 28 ICAP Shipping International Limited 2010. All rights reserved.
Dry Bulk FFA Market Volatility (Cape +1Q contract)
We believe that:
The FFA contracts will evolve into standard futures contracts
Options trading will rise
Cleared volumes will grow further
As a result, the clearing services will become cheaper
Screen trading will finally gain ground
Primary & Secondary markets will develop further
After the current shock is over, trading volumes will grow (incl. OTC)
The correlation with the underlying is already increasing
Volatility to remain high but on shorter time frame
With the growing participation of financial institutions we expect the
market to evolve into a 2-tier market
0
5
10
15
20
25
30
35
40
45
50
Sep
05
Dec
05
Mar
06
Jun
06
Sep
06
Dec
06
Mar
07
Jun
07
Sep
07
Dec
07
Mar
08
Jun
08
Sep
08
Dec
08
Mar
09
Jun
09
Sep
09
Dec
09
Mar
10
Jun
10
Sep
10
%
Tanker FFA Market Volatility (TD3 +1Q contract)
Conclusions
0
5
10
15
20
25
30
35
40
45
Sep
05
Dec
05
Mar
06
Jun
06
Sep
06
Dec
06
Mar
07
Jun
07
Sep
07
Dec
07
Mar
08
Jun
08
Sep
08
Dec
08
Mar
09
Jun
09
Sep
09
Dec
09
Mar
10
Jun
10
Sep
10
%
-
ICAP Shipping International Limited 2010.
This report has been prepared by ICAP Shipping or its affiliates ("ICAP Shipping") and is addressed to ICAP Shipping customers only and is for
distribution only under such circumstances as may be permitted by applicable law. This information has no regard to specific investment objectives,
financial situation or particular needs of any specific recipient. It is published solely for informational purposes and this information is not, and should not
be construed as, an offer or solicitation to sell or buy any product, investment, security or any other financial instrument. ICAP Shipping does not make
any representation or warranty, express or implied, as to the accuracy, completeness or correctness of the information contained herein, nor is it
intended to be a complete statement or summary of the securities, markets or developments referred to in the report. Neither ICAP Shipping, nor any of
its directors, employees or agents, accepts any liability for any loss or damage, howsoever caused, arising from any reliance on any information or
views contained in this report. While this report, and any opinions expressed in it, have been derived from sources believed to be reliable and in good
faith they are not to be relied upon as authoritative or taken in substitution for the exercise of your own commercial judgment. Any opinions expressed
in this report are subject to change without notice and may differ from opinions expressed by other areas of the ICAP group. ICAP Shipping is under no
obligation to update or keep current the information contained herein. This report may not be reproduced or redistributed, in whole or in part, without the
written permission of ICAP Shipping and ICAP Shipping accepts no liability whatsoever for the action of third parties in the respect. Certain companies in
the ICAP Shipping group are authorised and regulated by the Financial Services Authority. This information is the intellectual property of ICAP Shipping.
ICAP Shipping and the ICAP Shipping logo are trademarks of the ICAP group. All rights reserved.
Produced by ICAP Shipping Research
Managing Director James Leake
Head of Dry & Basic Materials Research Georgi SlavovDry Analysts - Michael McHugh, Nneka Chike-Obi, Robin Von Stauffenberg, Rui Guo
Head of Oil & Tanker Research Simon ChattrabhutiSenior Tanker Analyst -Simon Newman
Tanker Analysts - Angela Fang, Stavroula Betsakou
Head of Consultancy - Dr. Philip Rogers
ICAP Shipping International Limited, 2 Broadgate, London EC2M 7UR United Kingdom +44 20 7459 2000
shippingresearch@icap.com
www.icapshipping.com
ICAP Shipping Derivatives Limited and ICAP Shipping Tanker Derivatives Limited are authorised and regulated by the Financial Services Authority
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