Baltic Dry Index altered to boost derivatives trading

Changes will be made to how the Baltic Dry Index (BDI) is calculated in an effort to boost derivatives trading, the Baltic Exchange announced today.

From July 1, the BDI will be calculated taking the average timecharter rate of each of the Baltic's capesize, panamax, supramax and handysize indices. Each vessel type's routes make up 25% of the BDI.

Mutual funds, hedge funds and traders have shown a considerable interest generally in exposure to dry bulk freight rather than in the very specific existing liquid derivative contracts according to Jeremy Penn chief executive of the Baltic Exchange.

"By re-selecting the index so that it consists entirely of components which are already relatively liquid in the derivatives market, we believe we are making this process considerably easier. It will enable market-makers to offer pricing and hedge resultant positions easily," he says.

Backtesting of the reselected index against historical data suggests a correlation of 0.99978 so existing usage of the index for econometric and freight market analysis will not be significantly affected.

The BDI is published every working day at 1300 (London) and is based on professional shipbroker assessments. The index is a barometer of the cost of transporting dry bulk commodities including iron ore, coal and grain by sea.