What Are Forward Freight Agreements

The London-based Baltic Exchange presents the Daily Baltic Dry Quality Index as a market barometer and leading indicator of the maritime industry. There are investors An overview of the price of transferring important raw materials by sea, but it also helps to lease freight derivatives. The index includes 20 shipping routes, measured on the basis of timing, and covers various major bulk carriers, including Handysize, Supramax, Panamax and Capesize. 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. 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). Options are the most advanced derivatives that are increasingly being used in shipping lately. This happens because, as we will see later, they offer even more flexibility than common FFA. Unlike futures and futures contracts that impose a bargaining obligation on counterparties, the option allows the buyer to decide whether to do the same and then negotiate.

However, the seller of the option has no choice if the buyer chooses to do the same. Options are also traded on both the stock markets and the CTA. There are two types of options. Call options and selling options. Call options give someone the right to buy an asset at a certain price, while put options give someone the right to sell an asset. For the purchase of an option, you pay the premium, whereas the buyer does not need to write a margin, because he has the opportunity to exercise the same thing and therefore poses no risk to his counterparty. On the other hand, a margin must be made by the seller as collateral. There are four main strategies that are often used in options trading: at this point, we look at an example of how it works: in February 2016, a distributor buys three loads of NOPAC cereals in Japan, which will be transported when the grain season begins: one in August, one in September and one in October. The distributor is concerned that the shipping market will rise in August and wants to secure its freight against such a potential increase. On the other hand, a Panamax shipowner, who fixed his ship when the charter opened in mid-July in the Far East, fears that the market will loosen again, and that is why he wants to sell an FFA.

The owner and charterer negotiate and set in August 8,000 USD/day for a duration of 50 days (estimated duration of the trip) and the billing price based on BPI-Route 3a (the Trans-Pacific route for Panamax-Bulker s) as an average of the last 7 indices published in August 2016.