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Clarkson Securities Limited

  • FFA products
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    • – Overview
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Home / FFAs - The Product / Dry Cargo Market / Overview

Dry cargo FFA market

FFAs - A contract for differences

For FFAs to work as a long-term market, there must be more to them than just a self-interest in buying low and selling high on headline or sentiment-driven pricing.

So what creates the freight derivatives market? Part of the answer lies in the mutual, but opposite interests of the natural buyer (Charterer) and the natural seller (Owner) in the shipping market and the opportunities these creates for the Trader or Operator in the middle. It was largely these tensions which helped Clarksons when the idea of Forward Freight Agreements was pioneered in 1991.

Freight has become a major factor in the costing up of dry commodities over the past few years. To counteract the effect of freight rate fluctuations, FFAs offer an opportunity to hedge and trade specific routes and the time charter average as a financial tool.

Capesize, Panamax, Supramax and Handysize are the four standard vessel sizes (in descending order) and they carry dry bulk cargoes from round the world. They are each represented by the Baltic Time Charter Indices – BCI, BPI, BSI and BHSI - which form the basis for trading freight swaps. Please see Indices for more details.

The concept of swapping financial risk is widely used in commodity, currency and interest rate markets and has a proven track record. These contracts are easy to execute and they offer the convenience of cash settlement and confidence in the indices. FFAs have enjoyed substantial growth since inception and the trend looks set to continue.

A hedger of the freight markets will often regard the minimum FFA trade as being at least half of one full cargo for his vessel for it to achieve commercial relevance; a sentiment trader may be very happy to back the perceived market direction in reduced quantity. FFAs trade in various sizes from typical 5 days per months to full contracts of 30/31 calendar days per month.

Spread trading is used to take advantage of market direction and the proportional freight differential between the sizes. For instance, if the physical Capesize market moves up, the spread to Panamax freight rates will widen and facilitate selling the spread. This type of relationship works all the way down the line of sizes; between Panamax and Supramax and between Supramax and Handies. Similarly, when a spread narrows, spreaders will buy into it.

As liquidity of the FFA market increased, Clarkson Securities also introduced Options trading on freight. For further information see FFA Options.

FFAs are only concerned with the dollar value of the freight - not the logistics of shipping cargoes. In the near perfect world of FFAs, there are no weather delays or strikes – as in fact there is no option of physical delivery.

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