Volatility in iron ore prices “goes bananas” prompting an explosion in swaps and options trade volumes
London September 10, 2012.

Leading iron ore and steel broker Freight Investor Services has brokered a flurry of iron ore and freight options through the Singapore Exchange on the first day that SGX launched clearing for these contracts.

The counterparties involved in the six SGX options trades brokered by FIS were varied, including Cargill, Deutsche Bank, Macquarie Bank, Paralos Fund and other undisclosed funds.

Mr John Banaszkiewicz MD of Freight Investor Services, said that “With the move to spot commodity purchases of iron ore and steel, prices for iron ore delivered into China have swung from a high of USD 149.40 per tonne in April to a low of USD 86.70 per tonne last Wednesday, only to rally following the announcement of China’s new stimulus package on Friday. This has helped swaps prices for q4 jump to USD 107 per tonne.”

Volatility has “gone bananas”, according to Mr Banaszkiewicz, and is helping to drive cleared iron ore swaps and options volumes to a potential 175 million tonnes for 2012, a 270% rise from 47.2 million tonnes in 2011. With iron ore prices having an implied volatility of 42%, these derivatives tools are essential for market participants to trade and manage risk.

Despite the recent slump in freight rates, implied volatility is over 100% in Q4 12, which puts other commodity markets in the shade.

Mr Demetris Polemis principal of the Paralos Fund, the largest and most active fund exclusively trading FFAs said that “Options are an integral part of the Paralos Fund strategy, and we are very happy that SGX has started clearing FFA (forward freight agreement) options, bringing more liquidity to a growing market.”

Based on volume, FIS was voted the leading iron ore broker on SGX for the past three years.

Source - FIS

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