FFAs, the most common freight derivative, are traded under the terms and conditions of the Forward Freight Agreement Broker Association (FFABA). The main terms of an agreement include the agreed itinerary, the date of the billing, the size of the contract and the rate at which the differences are compensated. 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 4 major strategies that are often used in options trading: the London-based Baltic Dry Index makes the Baltic Dry Index a daily market barometer and a leading indicator for 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. The instruments are billed using various freight price indices published by the Baltic Exchange and the Shanghai Shipping Exchange. On the other hand, compensation contracts are awarded daily through the clearing house provided for this purpose.
At the end of each day, investors receive or owe the difference between the price of paper contracts and the market index. Clearing services are provided by leading exchanges such as nasdaQ OMX Commodities, the European Energy Exchange and the Chicago Mercantile Exchange (CME), to name a few. 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. FFAs are financial instruments that are traded in principle, mainly within the framework of the average charter values in time for the Capesize, Panamax, Supramax and Handysize vessels.