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Currency Adjustment Factor – Definition

Currency Adjustment Factor (CAF) Definition

The currency adjustment factor (CAF)  refers to a surcharge that is placed on freight charges and transactions between the United States and the Pacific Rim. The surcharge is an additional fee placed on freight costs was developed to give account for vulnerability in the currency exchange rate between these countries.

A Little More on What is Currency Adjustment Factor (CAF)

Due to constant fluctuation in the exchange rate for carriers in the United States and the Pacific Rim, the currency adjustment factor (CAF) was developed. CAF represents the additional fee placed on freithing costs to offset the impacts of volatility in currency exchange rates. The exchange rate risk is however transferred to the consumers through CAF. ultimately, CAF was developed to ensure that carriers do not bear the disadvantages of exchange rates in freight costs all alone. Before CAF was developed, shipping companies often bear additional costs on freight as a result of volatility in the currency exchange rates between countries. This challenge was more peculiar in freight shipments between the United States and Pacific Rim. CAF was developed as a response to this problem.

Examples of currency adjustment factors

Shipping companies in the United States and the Pacific Rim countries are often exposed to additional costs due to fluctuations in exchange rates. For example, Apple Inc. a U-S based company that produces iphones receive shipment of chips from Sony Corporation, a Japanese corporation. The shipment was done by Dermont shipping, a company well versed with the fluctuations of exchange rates between the two currencies. In order to hedge exchange rate risks, Dermont shipping can impose CAF on both parties before signing the contract for the shipment.

References for Currency Adjustment Factor

https://www.investopedia.com/terms/c/caf.asp

https://www.logisticsglossary.com/term/caf/

http://www.businessdictionary.com/definition/currency-adjustment-factor-CAF.html

Academic Research for Currency Adjustment Factor

Risk management methods for the liner shipping industry: the case of the Bunker Adjustment Factor, Menachof, D. A., & Dicer, G. N. (2001). Maritime Policy & Management, 28(2), 141-155. The implementation of the BAF (Bunker Adjustment Factor) enables a shipowner to shift the file price fluctuation risk to the shipper. The shippers generally do not want to make payment of such like surcharges. This paper proposes an alternative approach of risk management which is more effective as compared to the current approach when reacting to the demands of the customer service for simplified tariffs. If the shipowner uses the commodity futures strategically, he can minimize the risk exposure in a better way, shifting it at the futures exchanges to the willing parties, thus, there is no need of any bunker surcharge.

  • An analysis of bunker adjustment factors and freight rates in the Europe/Far East market (2000–2004), Cariou, P., & Wolff, F. C. (2006). Maritime Economics & Logistics, 8(2), 187-201. This research emphasizes on the monthly relation between the BAF (Bunker Adjustment Factor) and the bunker price and also between the charter rate and freight rate on the Far East/Europe container trade. It investigates the causality relation exists between these variables or not. This is to know whether the cost considerations mainly drive tariffs as the shipping lines claimed in the past five years. The results from VECR and VAR show that the Granger Causality (GC) exists. The findings suggest that the shipping conferences should stress more on announcements of rate restoration or the justified or unjustified BAF instead of a general discussion on exemption of collective pricing.
  • Container freight rates and the role of surcharges, Slack, B., & Gouvernal, E. (2011). Journal of Transport Geography, 19(6), 1482-1489. This paper shows that the structure of freight rates of the ocean container is becoming more complex. The carriers are imposing a large number of surcharges on the customers. The authors examine these elements on the basis of an export rates data set from ports on the NER (Northern European Range). This article makes a comparison of base rates and the surcharge. It then describes the implications for shippers who encounter increasing uncertainty while planning supply chains. The authors also examine a few problems for research on freight rates. Moreover, they investigate the suitability of several variables to predict freight rates.
  • Risk management methods for the liner shipping industry: the response to customer service demands for simplified tariffs, Menachof, D. (1996). Journal of Business Logistics, 17(1), 259. The total cost analysis is one of the principles of logistics to decision making. This paper discusses the financial futures markets in the domain of total cost management. The need to seek alternatives for risk management arises because of the shippers’ desire to increase customer service, including simple tariff schemes, shippers’ dissatisfaction on the methods the liner firms apply to estimate surcharges at the published rate, the rise in non-conference competition on several routes and the application of risk management methods in bulk shipping. The conference system has enabled the liner firms to pass on all business costs to the shipper.
  • Currency adjustment factors: some alternative strategies, O’Brien, T. R. (1980). Maritime Policy and Management, 7(4), 271-281. This paper considers a few problems related to currency disparities or fluctuations and particularly, their impacts on freight earnings by applying a CAF (Currency Adjustment Factor). The shippers and their councils are much interested in the CAF operations. Many businesses regard the CAF system as punitive and iniquitous. They accuse conferences of insulting themselves from currency losses because of exchange rate variability resulting in the emergence of Flexible Exchange Rates (FER) in 1971. However, this pressure brings the CAF formula operations under close scrutiny particularly, from 4 sources. The ESC (European Shippers’ Council), The JSC (Japanese Shippers’ Council), The differential CAFs legality under the TOR (Treaty of Rome), Complaints from NCM (North Continental Maltsters.
  • The rationale behind and effects of Bunker Adjustment Factors, Wang, D. H., Chen, C. C., & Lai, C. S. (2011). Journal of Transport Geography, 19(4), 467-474. The BAF (Bunker Adjustment Factor) system was first time brought forth in the 1970s following the oil shocks. Shipping lines were otherwise not able to make price adjustments. The BAF is considered as the none of contention between shippers and carriers. In the sight of ocean carriers, it is a must evil to control their exposure to the volatility of the bunker price whereas in the sight of shippers, this risk needs to be taken as a common commercial venture or handled in a more transparent manner. When bunker surcharges starting moving upward in 2003, BAF disputes were the main hurdle in the dialogue between the shippers and the carriers.
  • Currency adjustment factors, O’Brien, T. R. (1980). Maritime Policy and Management, 7(2), 127-132. The way, the CAFs (Currency Adjustment Factors) are applied to cargo the lines carry, is secretive and arbitrary. This paper aims to clarify how to calculate the CAF and in what way, it is applied. The 2 methods operation (the radical review and the monthly review) is just a device that allows the conferences to adjust reasonable charges such that leave lines with no loss in actual revenue, though small gains and losses are inevitable since the implementation of this operation is time-taking. Finally, the author expects that the volatile CAF changes trenches on the uncertainty of the costs of lines.
  • A most vexatious business’: Union Shipping and the trans–Tasman liner trade, Trace, K. (1992). Australian Economic History Review, 32(2), 90-111. The objective of the CER (Closer Economic Relations Trade Agreement) is to integrate and rationalize the economies of New Zealand and Australia by overcoming barriers to trade and create harmony in business regulation. This paper emphasizes the post-1970 trade of Trans-Tasman Liner which is characterized as a comparatively low and short volume trade helping a few efficient dedicated lines. The shippers seek a high service frequency relatively in spite of low cargo volumes. The organizational barriers stop the employment of FFCTV (Foreign-Flag Cross-Trading Vessels) leaving the trade to New Zealand and Australian registered vessels. The shipowners bear increasing onshore costs at both sides of the voyage.
  • The container revolution and liner freights, Kaukiainen, Y. (2009). International Journal of Maritime History, 21(2), 43-74. After the 2nd World War, Martin Stopford regraded the outstanding development of international shipping as a process dominated by 2 technical revolutions. The 1st one was the 1960s-1970s BSR (Bulk Shipping Revolution). These developments made the shipping efficiency better and minimized the transportation cost of raw materials by sea to a greater extent such that the goods markets like coal, oil, iron, etc. became really global. The 2nd revolution is the Container Revolution (CR). By substituting the perplexing packages in which different semi-finished and finished goods were stowed with a steel container of standard size on the liners’ tween-decks. The unloading and loading times were made short from weeks to hours.
  • Assessing the impact of port charges on ocean carriers’ choice of vessel size, service routes, and service frequency, Park, B. I., & Min, H. (2014, January). In Supply Chain Forum: An International Journal (Vol. 15, No. 2, pp. 34-46). Taylor & Francis. Since seaports handle most of the international trade, their use and efficiency may lead to the growth and prosperity of the world economy. Authorities of several ports are eager to devise port investment strategies to expand or improve the port infrastructure. In these plans, generally, the required port finances are assured through wise port pricing. This paper considers the inter-dynamics among port finance, port selection decisions of ocean carriers and port efficiency. The authors present a mathematical model on the basis of non-cooperative game theory which assists the terminal operating firms and port authorities in making the most wanted port charging plan.
  • Optimal slot allocation with empty container reposition problem for Asia ocean carriers, Feng, C. M., & Chang, C. H. (2009). International Journal of Shipping and Transport Logistics, 2(1), 22-43. This study considers revenue management modelling to allocate an optimal slot for ocean carriers providing a certain shipping service route. The model comes up with the empty container reposition cost and formulated with the help of mathematical programming in order to increase the operational gain of ocean carriers affected by constraints of empty container supply, container demand and vessel capacity. Computational outcomes not only show slot allocation port to port as a guideline to apply space control but also overviews the strategic alliance status among ocean carriers, particularly the ones from Asian countries.

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