Freight Forward Agreement Derivatives
As we know very well, shipping is a very risky and volatile sector. In the past, both dry matter and oil and oil markets have fallen sharply or increased in a few days, and forecasts are very difficult (short-term), if not impossible (in the long run). To cope with their market risks, market participants can use different instruments. Fixing a temporary charter ship/naked hull is a traditional solution used to block your income (owners) or your transport costs (charterer) for a certain period of time. However, this measure is not flexible at all, as the vessel is bound for a long period of time and the exit of a contract can be costly. Fleet diversification is another traditional instrument used by shipowners. By diversifying the fleet, a shipowner participates in several markets where market risks are shared. To overcome the disadvantages of traditional market risk management strategies, a more advanced instrument has recently been developed: Freight derivatives. Let`s look at freight derivatives, their history and use in the marine industry, and how they work. Freight derivatives include exchange-traded futures, futures, futures contracts, futures contracts (FFAs), container freight swap agreements, container cargo derivatives and physical delivery derivatives.
The settlement price (7 days average) was finally USD 8,500/day, which is why the FFA seller (owner) pays the difference to the FFA buyer (charterer) for 50 days ($500 per day – $50-$25,000). Indeed, no party loses money, since the charterer takes back the $500 paid to the owner in the physical market, while the owner pays nothing out of his own pocket, since the $25,000 is part of the total freight he earned (since he earned 8,500/day on the physical market). A shipowner uses the index to monitor freight rates and protect them from lower freight rates. Charters use them to reduce the risk of higher freight rates. The Baltic Dry Index is considered a leading indicator of economic activity, as an increase in dry basic shipping indicates an increase in raw material production that stimulates growth.