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Freight derivative

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Title: Freight derivative  
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Subject: Derivative (finance), List of commodities exchanges, Exotic derivatives, Michael Marcus (trader)
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Freight derivative

The international shipping industry can be divided into four closely related shipping markets, each trading in a different commodity: the freight market, the sale and purchase market, the newbuilding market and the demolition market. These four markets are linked by cash flow and push the market traders in the direction they want.

The freight market

The freight market consists of shipowners, charterers and brokers. They use four types of contractual arrangements: the voyage charter, the contract of affreightment, the time charter and the bareboat charter. Shipowners contract to carry cargo for an agreed price per tonne while the charter market hires out ships for a certain period. A charter is legally agreed upon in a charter-party in which the terms of the deal are clearly set out.

Freight derivatives

Freight derivatives, which includes Forward Freight Agreement (FFA), container freight swap agreements and options based on these, are financial instruments for trading in future levels of freight rates, for dry bulk carriers, tankers and containerships. These instruments are settled against various freight rate indices published by the Baltic Exchange (for Dry and most Wet contracts) & Platt's (Asian Wet contracts).

FFAs are often traded over-the-counter, through broker members of the Forward Freight Agreement Brokers Association (FFABA), such as Clarkson's Securities, Marex Spectron, SSY - Simpson, Spence and Young, Braemar Seascope LTD, Ifchor, Freight Investor Services, BGC Partners, GFI Group, ACM Shipping Ltd, BRS, Tradition-Platou and ICAP. However, screen-based trading is becoming more popular , through various screens. Trades can be given up for clearing by the broker to one of the clearing houses that support such trades. There are four clearing houses for freight: NOS Clearing/NASDAQ OMX, LCH.Clearnet, CME Clearport, ICE Futures Europe and SGX. Freight derivatives are primarily used by shipowners and operators, oil companies, trading companies, and grain houses as tools for managing freight rate risk. Recently, with commodities standing at the forefront of international economics, the large financial trading houses, including banks and hedge funds, have entered the market.

Baltic Dry Index measures the cost for shipping goods such as iron ore and grains. The trading volume of dry freight derivatives, a market estimated to be worth about $200 billion in 2007, grew as those needing ships attempted to contain their risks and investment banks and hedge funds looked to make profits from speculating on price movements. At the close of the 2007 financial year, the number of traded lots on dry FFAs doubled the derived physical product.

The sale and purchase market

In the sale and purchase market, second-hand ships are traded between shipowners. The administrative procedures used are roughly the same as in the real-estate business, using a standard contract. Trading ships is an important source of revenue for shipowners, as the prices are very volatile. The second hand value of ships depends on freight rates, age, inflation and expectations.

The newbuilding market

The newbuilding market deals with transactions between shipowners and shipbuilders. Contract negotiation can be very complex and extend beyond price. They also cover ship specifications, delivery date, stage payments and finance. The prices on the newbuilding market are very volatile and sometimes follow the prices on the sale and purchase market.

The demolition market

On the demolition market ships are sold for scrap. The transactions happen between shipowners and demolition merchants, often with speculators acting as intermediaries.

See also


  • Martin Stopford; Maritime Economics (3rd edition, 2009)
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