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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 route.
FFAs are contracts between two clients; one party (the Buyer) is committed to a
view that an agreed route (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 a component part 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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