Freight derivatives include exchange-traded futures, swap futures, preferential freight agreements (BSAs), container freight swaps, container freight derivatives and physical freight derivatives. The billing price (average of 7 days) was ultimately USD 8500/day, which is why the FFA seller (owner) pays the difference to the FFA buyer (charterer) for 50 days ($500/day * 50 = $25,000). In fact, no party loses money since the charterer recovers the $500 that was paid to the owner on the physical market, while the owner does not pay anything out of his own pocket, since the $25,000 is part of the total freight he earned (since he earned 8,500/day in the physical market). Freight derivatives are financial instruments whose value is derived from future freight rates, such as.B. Dry bulk transport rates and tanker rates. Cargo derivatives are often used by end-users (shipowners and grain producers) and suppliers (integrated oil companies and international trading companies) to mitigate risks and guard against price fluctuations in the supply chain. However, as with any derivative, market speculators – such as hedge funds and retailers – are involved in both buying and selling freight contracts that offer a new, more liquid market. The London Baltic Exchange publishes the Baltic Dry Index daily as a market barometer and leading indicator of the shipping industry. It provides investors with an overview of the shipping price of key commodities, but also helps with the pricing of freight derivatives.
The index includes 20 sea routes measured on a seasonal map basis and covers various bulk carriers of different sizes, including Handysize, Supramax, Panamax and Capesize. Options are the most advanced derivatives that have been increasingly used in shipping lately. This happens because, as we will see below, they offer even more flexibility than the usual FFE. Unlike futures and futures, which impose an obligation on counterparties to trade, the option allows the buyer to choose whether or not to exercise it and then trade. However, the seller of the option has no choice if the buyer chooses to exercise it. Options are also traded on exchanges and over-the-counter. There are two types of options. Purchase options and selling options.
Put options give someone the right to buy an asset at a certain price, while put options give someone the right to sell an asset. For the purchase of an option, we pay the premium, while the buyer does not have to set a margin, since he has the opportunity to exercise it, and therefore there is no risk for his counterparty. On the other hand, a margin is required, which must be placed by the seller as collateral. There are 4 main strategies commonly used in options trading: FFE, the most common freight derivative, are traded extrably under the terms of the Forward Freight Agreement Broker Association (FFABA) standard contracts. The main terms of an agreement include the agreed route, the time of settlement, the size of the contract, and the rate at which differences are settled. As we know, shipping is a very risky and volatile industry. .