Freight derivatives include exchange-traded futures, futures, futures contracts, futures contracts (FFAs), container freight swap agreements, container cargo derivatives and physical delivery derivatives. The instruments are billed using various freight price indices published by the Baltic Exchange and the Shanghai Shipping Exchange. On the other hand, compensation contracts are awarded daily through the clearing house provided for this purpose. At the end of each day, investors receive or owe the difference between the price of paper contracts and the market index. Clearing services are provided by leading exchanges such as nasdaQ OMX Commodities, the European Energy Exchange and the Chicago Mercantile Exchange (CME), to name a few. We also encounter swaps, but also in other sectors of the maritime industry (finance, accounting) to manage the risk associated with interest rate fluctuations (interest rate swaps). Derivatives are used for hedging, in which Hedger enters into a futures/advance contract contrary to its position in the physical market, in order to counteract changes in the value of the spot position by offsetting changes in the value of the derivative. They are also used for cargo projections. If you look at derivatives trading, you can get an idea of the future movements of the physical market. Studies have shown that FFAs can be used to predict the direction of the spot market for about 2 months.
Finally, derivatives are also used for speculative purposes, as transaction costs are much lower than in physical markets. Speculators – who are not necessarily shipping professionals – help the derivatives market because they provide market liquidity. FFAs, the most common freight derivative, are traded under the terms and conditions of the Forward Freight Agreement Broker Association (FFABA). The main terms of an agreement include the agreed itinerary, the date of the billing, the size of the contract and the rate at which the differences are compensated. As we know very well, shipping is a very risky and volatile sector. In the past, both dry matter and oil and oil markets have fallen sharply or increased in a few days, and forecasts are very difficult (short-term), if not impossible (in the long run). To cope with their market risks, market participants can use different instruments.