Freight derivative
Encyclopedia
Freight derivatives, which includes Forward Freight Agreement
(FFA), container freight swap agreements
and options based on these, are financial instruments for trading in future levels of freight rates, for dry bulk carrier
s, tanker
s and containerships. These instruments are settled against various freight rate indices published by the Baltic Exchange (for Dry and most Wet contracts) & Platt's (Asian Wet contracts). FFAs are often traded over-the-counter (through broker members of the Forward Freight Agreement Brokers Association - FFABA - such as Clarkson's Securities, SSY - Simpson, Spence and Young, Braemar Seascope LTD, Ifchor, FIS - Freight Investor Services, BGC Partners, GFI Group Inc, ACM Shipping Ltd, BRS, Tradition-Platou, ICAPHYDE and IMAREX); 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 four clearing houses for freight: NOS Clearing
, LCH.Clearnet
, NYMEX (NY Mercantile Exchange) and Singapore Stock Exchange (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 houses, 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.
Forward freight agreement
A forward freight agreement is a financial forward contract that allows ship owners, charterers and speculators to hedge against the volatility of freight rates. It gives the contract owner the right to buy and sell the price of freight for future dates...
(FFA), container freight swap agreements
Container Freight Swap Agreement
Container Freight Swap Agreements are a financial futures contract that allow for hedging and speculating against the volatility of seaborne, intermodal container box-rates....
and options based on these, are financial instruments for trading in future levels of freight rates, for dry bulk carrier
Common carrier
A common carrier in common-law countries is a person or company that transports goods or people for any person or company and that is responsible for any possible loss of the goods during transport...
s, tanker
Tank truck
A tank truck or road tanker is a motor vehicle designed to carry liquefied loads, dry bulk cargo or gases on roads. The largest such vehicles are similar to railroad tank cars which are also designed to carry liquefied loads...
s and containerships. These instruments are settled against various freight rate indices published by the Baltic Exchange (for Dry and most Wet contracts) & Platt's (Asian Wet contracts). FFAs are often traded over-the-counter (through broker members of the Forward Freight Agreement Brokers Association - FFABA - such as Clarkson's Securities, SSY - Simpson, Spence and Young, Braemar Seascope LTD, Ifchor, FIS - Freight Investor Services, BGC Partners, GFI Group Inc, ACM Shipping Ltd, BRS, Tradition-Platou, ICAPHYDE and IMAREX); 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 four clearing houses for freight: NOS Clearing
Imarex
The International Maritime Exchange or Imarex is an Oslo-based exchange for trading forward freight agreements . It started trading tanker freight futures contracts in 2001, followed by dry cargo freight futures contracts in 2002. All futures contracts are cleared by the Norwegian Futures and...
, LCH.Clearnet
LCH.Clearnet
LCH.Clearnet is an independent clearing house based in Europe that serves major international exchanges and platforms, as well as a range of OTC markets...
, NYMEX (NY Mercantile Exchange) and Singapore Stock Exchange (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 houses, including banks and hedge funds have entered the market.
Dry Freight or Dry-Bulk FFAs
The Baltic Exchange, Baltic Dry Index
Baltic Dry Index
The Baltic Dry Index is a number issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index tracks worldwide international shipping prices of various dry bulk cargoes....
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.