On October 22, Air Cargo News reported that the Baltic Air Freight Index compiled by TAC Index rose 4.7 percent in the week to October 19 and stood 26.4 percent above the same week last year, with China to United States lanes leading the increase. In its October 20 update, Freightos reported that its China to North America air index had risen 19 percent in a week to $6.88 per kilogram. Much of the freight that will move on those lanes in November was quoted before either number was printed, and those quotes are still valid.
A quote valid for 30 days is an option. The forwarder wrote it, the customer holds it, and nobody charged a premium.
A free option with a one sided payoff
If the market rises after the quote is issued, the customer tenders at the quoted rate and the forwarder buys capacity at the new, higher price. If the market falls, the customer asks for a requote, takes a competitor's lower number, or does not ship under that quote. The customer wins in both directions. The forwarder wins in neither.
Take an illustrative lane. Quote $5.00 per kilogram, valid 30 days. Suppose the market at tender is equally likely to be $4.25 or $5.75. In the up case the forwarder is $0.75 per kilogram under market on everything tendered. In the down case the customer requotes and the forwarder earns the market rate at best. The expected cost of the validity clause is half of $0.75, about $0.38 per kilogram, or 7.5 percent of the quoted rate. On a lane that moves 19 percent in a week, that swing is conservative.
The cost rises with 2 things: lane volatility and validity length. A 7 day quote on a stable lane is a small option. A 30 day quote in the middle of a rate run, in a quarter in which jet fuel is up 113.7 percent on a year earlier according to the IATA monitor cited in the same report, is a large one.
What validity should cost
Once validity is seen as an option, pricing it is ordinary work. The simplest instrument is length: 7 days on volatile lanes, 30 on stable ones, with the difference made explicit to the customer. The second is a validity premium: the same rate for 7 days, or 4 percent more for 30, so the customer chooses how much certainty to buy. The third is indexation: a quote expressed as the index at tender plus a margin, which removes the option entirely and suits a customer who ships every week anyway.
The fourth is quantity. An open quote with no volume cap is an option on an unlimited quantity. Capping it at the customer's forecast turns it into a defined position.
None of this needs a model more complicated than the one already used to set the base rate. It needs 2 more fields on the quote template.
The quote book is a position
Every open quote is a short option. Add them up by lane, weight them by expected volume and remaining validity, multiply by the lane's observed volatility, and the result is the pricing desk's exposure to a market move. In the operations we have seen, nobody has that number, because the quote book is treated as a sales pipeline rather than a risk position.
The hedge is the other side of the book. Capacity bought under a block space agreement at a fixed rate covers the quotes written against it. Quotes written against capacity to be bought at spot are uncovered. The 2 numbers a pricing desk should see every morning are the open exposure and the covered share.
A week in which the index moves 19 percent is the week those numbers are worth the most. It is also the week most desks discover they never had them.