Shipping Terms Forward Freight Agreement
The London-based Baltic Exchange presents the Daily Baltic Dry Quality Index as a market barometer and leading indicator of the maritime industry. There are investors An overview of the price of transferring important raw materials by sea, but it also helps to lease freight derivatives. The index includes 20 shipping routes, measured on the basis of timing, and covers various major bulk carriers, including Handysize, Supramax, Panamax and Capesize. A derivative is an instrument/contract that defines the terms of a transaction that will take place at a later date. The parties buy and/or sell a derivative basis to their expectations of market direction. The terms “buy” and “sell” are obviously short, as participants do not buy or sell physical assets, but buy or sell only a financial contract; a position relative to market management. In shipping, this means that the shipowner and the charterer do not have a real device between them – they will not be obliged to deliver a real ship or load a particular cargo – but they only take a position in the market in the future. Derivatives can be traded on the stock markets or otc. Exchange-traded derivatives are standardized contracts traded in a central place and guaranteed through a clearing house. Over-the-counter trading contracts are negotiated directly between the buyer and seller (or their brokers) and counterparties may be exposed to credit risk because not all trades are settled (but over-the-counter bookings are also being compensated). There are two types of derivatives used in shipping: freight derivatives first appeared in shipping in the 1980s, when Baltic Exchange introduced the BIFFEX (Baltic International Freight Futures Exchange) in 1985.
BIFFEX was an official exchange where futures could be bought and sold. BIFFEX was based on an index called BFI, which was the result of daily broker valuations and a mathematical formula, while it worked in the same way as any other futures market (z.B oil). All trades were anonymous and were guaranteed by the London Clearing House, while contracts, trading dates and periods as well as other financial and legal requirements were detailed. Once the commercial account was opened and all requirements were met, the customer could buy or sell future contracts. BIFFEX operated until 2002, because although it had been in a very difficult period for almost 15 years, interest eventually declined due to the use of forward freight agreements (FFA) instead of BIFFEX. 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. Fixing a temporary charter ship/naked hull is a traditional solution used to block your income (owners) or your transport costs (charterer) for a certain period of time. However, this measure is not flexible at all, as the vessel is bound for a long period of time and the exit of a contract can be costly. Fleet diversification is another traditional instrument used by shipowners. By diversifying the fleet, a shipowner participates in several markets where market risks are shared.