Freight derivative

Freight derivative

Freight derivatives, which includes Forward Freight Agreement (FFA) and options based on these, are financial instruments for trading in future levels of freight rates, for dry bulk carriers and tankers. These instruments are settled against various freight rate indices published by the Baltic Exchange (for Dry and some Wet contract) & Platt's (some Wet contracts.) FFAs are often traded over-the-counter (through brokers such as ICAPHYDE, Clarkson's Securities, SSY- Simpson, Spence and Young, FIS -Freight Investor Services, GFI, BRS & Tradition-Platou), but screen-based trading is becoming more popular, through various screens. Trades can be given up for clearing by the broker to one of the clearing houses that support such trades. There are three clearing houses for freight: NOS Clearing, LCH.Clearnet & SGX (Singapore). Freight derivatives are primarily used by shipowners and operators, oil companies, trading companies and grain houses as tools for managing freight rate risk. Recently with Commodities now standing at the forefront of international economics; the large financial trading house, including banks and hedge funds have entered the market.

Dry Freight or Dry-Bulk FFAs

The Baltic Exchange, Baltic Dry Index which measures the cost for shipping goods like iron ore and grains, doubled over the past 12 months and has risen more than fourfold since 2006.

The trading volume of dry freight derivatives, a market estimated to be worth about $200 billion in 2007, grew as those needing ships attempted to contain their risks and investment banks and hedge funds looked to make profits from speculating on price movements. At the close of the 2007 financial year, the number of traded lots on dry FFAs doubled the derived physical product.


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