Georgi Slavov_ ICAP

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?


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


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%


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


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


FFA market trends


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


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


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$)


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


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)


Trading the FFA market


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


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%


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


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


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


Long physical Short paper Monthly settlement

0

5000

10000

15000

20000

25000

Dec08:

execute


Revenue hedged Revenue not hedged

Hedging Strategies


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


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


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


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


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


Slow Stochastic

-50

0

50

100

150

Outright Trading Strategies


Intra-market arbitrage trading: same contract, different time

frame

Inter-market arbitrage trading: different contracts, same time

frame


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


Algorithmic trading also known as Black Box Trading is only suitable for liquid markets which

allow execution with minimum

slippage


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


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


1 1 1


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


Quo Vadis FFA market?


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.

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any representation or warranty, express or implied, as to the accuracy, completeness or correctness of the information contained herein, nor is it

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its directors, employees or agents, accepts any liability for any loss or damage, howsoever caused, arising from any reliance on any information or

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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

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Georgi Slavov_ ICAP

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