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Home / Dry cargo market

Dry Cargo FFA Market

FFAs - A contract for difference

The four standard vessel types - Capesize, Panamax, Supramax and Handysize (in descending size order) - carry dry bulk cargoes around the world. They are each represented by the Baltic Exchange Indices – BCI, BPI, BSI and BHSI – and timecharter averages which form the basis for trading freight derivatives. Please see Indices for more details.

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.

Freight has become a major factor in the costing of dry commodities. By counteracting the effect of freight rate fluctuations, FFAs offer opportunities to hedge and trade specific routes and timecharter averages as financial tools.

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

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 be commercially relevant. Whereas a sentiment trader may be very happy to support the perceived market direction by trading a smaller quantity. FFAs trade in various sizes from five days per month to full contracts of 30/31 calendar days per month.

Using FFAs to hedge physical exposure ( Download PDF)
Using FFAs speculative purposes ( Download PDF)

Straightforward swap trading has developed and lead to some more complex positions being taken. For example, spread trading is used to take advantage of market direction and the proportional freight differential between the sizes. This type of relationship works for all vessel sizes: between panamax and supramax and between supramax and handysize. Similarly, when a spread narrows, spreaders will buy into it. Time spreads for individual vessel types are also popular when traders can see a differential in the values for nearby and deferred contracts and take advantage of a discount or premium.

As liquidity of the FFA market increased, CSL introduced Options trading for dry and wet freight. For further information see FFA Options.

CSL works closely with Clarksons’ international team of dry cargo analysts to ensure that it is fully equipped to understand future trends in the freight market in order to best advise our clients. Our nightly market report includes analytical material as well as an assessment of that day’s movements.

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