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

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 use real options. To date, ocean transportation is the only mode of transportation where this type of contract, also known as a derivatives contract, has been applied. The purpose of this paper is to provide an overview of freight transportation derivatives. We start by reviewing the development of derivatives markets in the maritime industry. Based on our findings and on the experience accumulated in that industry, we investigate the adoption of derivatives contracts in trucking, which is the dominant freight transportation mode. This paper provides an understanding of the necessary conditions and potential benefits for the emergence of a market for truckload options