The Oslo-based International Maritime Exchange has launched an electronically traded and cleared futures contract on the Baltic Dry Index, a composite of global shipping costs for bulk commodities such as grains, ore and coal and a widely accepted measure of the state of international trade.
The Imarex BDI Index Futures contract is aimed at the cash equity and equity derivatives trading community as well as portfolio managers and commodity traders looking to increase their exposure to movements in the dry bulk shipping markets, and enables traders to buy and sell the entire dry bulk sector with one contract.
The demand for the contract comes from a widespread realisation that the most heavily traded dry bulk shipping shares correlate to a high degree with the movement of the underlying freight market.
Until now, the only tradable freight rate-related contracts which could be traded have been forward freight agreements, specialised derivative contracts that are tied to specific dry bulk trading patterns for defined vessel sizes, making it hard to define the link to shipping equities for most investors.
'We have sat through literally hundreds of meetings in the past year with portfolio managers exposed to shipping equities who spend their time tracking the BDI as a measure of where the market is heading', says Imarex chief executive Herman Michelet.
By trading the BDI Index Futures contract, stock portfolio managers can protect the value of the shipping equities portfolio from upside and downside price risk of the broader dry bulk market.
A shareholder in several listed dry bulk shipping companies can sell the contract short, profiting from a falling BDI, to protect the value of his portfolio against a fall in freight rates that would drag down the value of his shares.
'The BDI itself is a retrospective index published once a day and reflecting market movements in the previous 24 hours,' Michelet says. 'It is not a gauge of what might happen next - basically, you cannot trade the BDI itself. We have launched the BDI Index Futures to do to the BDI what S&P 500 futures do to the S&P 500 - make it tradable.'
The contract fills a void left by the Biffex, a London-based freight futures contracts with settlement based on the Baltic Freight Index which closed down in 2001, before the current shipping boom.
'The renewed interest in a similar product to the Biffex which is suitable to all manner of different shipping investors has grown from a whisper a few years ago to a roar in 2008,' Michelet says. 'We believe that the time is fully ripe for the reintroduction of a simple, electronically traded futures contract for dry bulk shipping.'
BDI Index Futures are cleared at NOS Clearing, and are available on the Imarex trading screen and via participating prime brokers and general clearing members.
The first contracts were traded within 30 minutes of the market opening on June 13. 'There has been a very healthy demand for this new contract, and the first few trades were concluded within the first half-hour,' Michelet says.
The first two contracts traded were both for the fourth quarter of 2008 at an Index price of 8200. The parties to the trade remain anonymous to other market participants.
'The beauty of trading this contract on the Imarex screen is there is a broad distribution of prices and all traders are fully anonymous,' Michelet says.