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FFA products
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The market for covering and settling forward freight risks in cash is relatively
young. It stems from the establishment of the Baltic International Freight Futures
Exchange (BIFFEX) in 1985, and the creation of the Baltic Freight Index (BFI) as
a settlement mechanism. In time, the BFI evolved into separate indices - for Dirty
and Clean Tankers, and for the Dry Cargo market, i.e., Capesize, Panamax, Supramax
and Handysize as well as for Sale and Purchase values.
All these indices will continue to alter organically to reflect the sizes and types
of vessels and cargoes traded in the physical market.
Clarksons have been supportive of all the developments within freight derivatives
since 1985. However, in order to accommodate more specific hedging needs, Clarksons
pioneered Forward Freight Agreements (FFAs) in 1991.
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Up to this point, clients had only been able to hedge the general health of the
Shipping market. Clarksons introduced a mechanism to trade an individual ship size.
FFAs are contracts between two clients; one party (the Buyer) is committed to a
view that an agreed ship size (based on an agreed quantity) will be valued higher
than an agreed rate on an agreed date. The other party (the Seller) contracts to
differ. In nearly all cases, it will be the average of the T/C routes of one of
the Baltic indices on the agreed date which determines the rate at which the FFA
is settled.
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 a convenience of cash settlement and a confidence in the
indices. FFAs have enjoyed substantial growth since inception, and the trend looks
set to continue.
As liquidity grew, Clarksons also introduced the ability to trade options. The most
common form of settlement is called European-averaged (or Asian). For further information
see FFA Options page.
It should be noted that Forward Freight Agreements are aimed at professional clients
only.
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FFAs are not for private clients.
CSL is authorised and regulated by the Financial Services Authority and is a
member of the FFA Brokers Association.
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