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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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