2001-06

Using Financial Options to Hedge Transportation Capacity in a Deregulated Rail Industry
Stephen M. Law, Alexandra E. MacKay, James F. Nolan
August, 2001

Abstract
The market for capacity in the rail industry, like many other industries classified as “natural monopolies” in earlier regulatory regimes, appears poised for change. This paper presents one predictive description of what a fully deregulated rail capacity market may look like and how it will function. Of particular interest is the potential for financial instruments, such as derivatives on rail freight capacity, to play a role in logistics decisions. We examine how hedgers may find this evolving market both useful and profitable. Markets for rail capacity and markets for infrastructure capacity in other competitive network-based industries share important similarities; hence, the framework developed in the context of the rail industry will be readily applicable elsewhere, such as in markets for electric transmission capacity.


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