Container Freight Swap Agreement
Encyclopedia
Container Freight Swap Agreements are a financial futures contract
that allow for hedging
and speculating against the volatility of seaborne, intermodal container
box-rates.
A container freight swap agreement most commonly takes the form of a cash-settled agreement between two parties with an equal and opposite opinion of the future of the market. The parties agree on a price in US$ per container for a given number of containers on an agreed route during a specified period. At the end of the contract period the parties settle the difference in cash between the predetermined contract price and the actual spot market price.
If the market strengthens, and box rates increase, then the buyer of a CFSA (the long position) benefits, since by entering the agreement they have effectively paid less, in advance, for the goods than they would have done trading on the spot market. The buyer of the CFSA has successfully hedged against an increase in cost of the underlying physical market.
Conversely, if the market softens, and box rates decrease, the seller of the CFSA benefits since they have effectively sold the goods, in advance, at a higher rate than they would have done trading on the spot market. In this case the seller of the CFSA has been successful in hedging against an increase in cost of the underlying physical market.
These agreements are currently available over-the-counter with clearing at LCH.Clearnet and SGX AsiaClear against the Shanghai Containerised Freight Index (SCFI).
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
that allow for hedging
Hedge (finance)
A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...
and speculating against the volatility of seaborne, intermodal container
Intermodal container
An intermodal container is a standardized reusable steel box used for the safe, efficient and secure storage and movement of materials and products within a global containerized intermodal freight transport system...
box-rates.
A container freight swap agreement most commonly takes the form of a cash-settled agreement between two parties with an equal and opposite opinion of the future of the market. The parties agree on a price in US$ per container for a given number of containers on an agreed route during a specified period. At the end of the contract period the parties settle the difference in cash between the predetermined contract price and the actual spot market price.
If the market strengthens, and box rates increase, then the buyer of a CFSA (the long position) benefits, since by entering the agreement they have effectively paid less, in advance, for the goods than they would have done trading on the spot market. The buyer of the CFSA has successfully hedged against an increase in cost of the underlying physical market.
Conversely, if the market softens, and box rates decrease, the seller of the CFSA benefits since they have effectively sold the goods, in advance, at a higher rate than they would have done trading on the spot market. In this case the seller of the CFSA has been successful in hedging against an increase in cost of the underlying physical market.
These agreements are currently available over-the-counter with clearing at LCH.Clearnet and SGX AsiaClear against the Shanghai Containerised Freight Index (SCFI).