How do they determine levels for the shipping Baltic Dry Index?

The Baltic Dry Index is used by ship owners and companies transporting dry goods by sea, but it is also increasingly popular among profit-driven investors as the basis for constructing trades involving maritime freight.

Forms of the BDI have been calculated and promulgated by London’s Baltic Exchange – the centre of London’s ship broking, owning, and financing community – since January 1985.

The Baltic Freight Index consisted at its inception of 13 voyage routes, covering cargoes from 14,000 metric tonnes of fertiliser up to 120,000 metric tonnes of coal.

The Baltic Exchange, which collates the data and publishes the resulting indices, said the BDI was developed “as a settlement mechanism for the newly-established Baltic International Freight Futures Exchange futures contract (and) quickly won worldwide acceptance as the most reliable general measure of the dry cargo freight market”.

The Exchange itself was born over 200 years earlier, from the Virginia and Baltick Coffee House in London, where merchants and ship captains met from at least 1744, to negotiate terms for shipping cargoes.

The BDI indices are used as the basis for freight derivatives, which allow today’s various maritime industry participants to hedge their freight costs, effectively set prices for hiring vessels, or for traders such as shipping hedge funds to target outright gain.

The indices were set originally at 1,000.

Separate dry bulk indices are calculated for each of four ship sizes.
In each case, they reflect via index levels the costs for transport of dry goods such as cereals, coal, steel, iron ore, and excluding costs of crew, insurance and regulatory compliance.

There are four indices, for four types (sizes) of ship.

 

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