Freight Transportation Derivatives Contracts: State of the Art and Future Developments

Abstract

In lean and demand-responsive logistics systems, orders need to be delivered rapidly, accurately, and reliably, even under demand uncertainty. Increasing burdens on the industry motivate the introduction of new methods to manage transportation service contracts. One way to hedge transportation capacity and cost volatility is to create derivative contracts. To date, ocean transportation is the only mode of transportation where this type of contract has been applied. The purpose of this article is to provide an overview of freight transportation derivatives and to discuss some recent relevant research. We start by introducing the theory underlying derivative contracts, before reviewing the development of derivatives markets in the maritime industry. We then investigate the adoption of derivatives contracts in trucking (the dominant mode of freight transportation), which we call truckload options. A numerical example follows to illustrate how derivatives could help financially both shippers and carriers. Finally, this article discusses the conditions necessary for the emergence of a market for truckload options.

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