Forward Freight Agreement
A Forward Freight Agreement (FFA) is a forward transaction that enables the contractual partners (typically ship owners and charterers) to fix a freight rate for a specific cargo on a specific route in advance.
backgrounds
Bulk FFAs evolved from BIFFEX (an index future contract traded on LIFFE ). The index futures represented a basket of three ship sizes that moved differently and in opposite directions. Trading houses announced the need to secure their freight positions more specifically. FFAs can be used to secure a specific index route that offers a much more precise hedge. In 1992 the time had come and the first FFA was traded. Since then, FFAs have been firmly established in shipping as part of the freight component.
A lot has happened since 1992. The Baltic Freight Index (since 1999 Baltic Dry Index ) has evolved and was split so that Capesize , Panamax , Supramax and Handysize (different ship sizes) each got a separate index. Tanker FFAs came into being in 1998 with the creation of the Baltic Dirty Tanker Index (BDTI) and the Baltic Clean Tanker Index (BCTI). They represent the missing link between the disparate markets of the underlying commodity markets.
The Tanker FFA (Forward Freight Agreement) market covers a number of standard tanker shipping routes, taking into account the different transport units. Crude oil is transported in larger quantities and therefore also in larger ships, whereas the refined oil is shipped in smaller quantities. The breakthrough in the financial world came with the first clearing opportunities in 2001. This move brought more trading volume and liquidity to the market. In 2008, the monthly traded volume for the bulk segment exceeded the 3 million lot mark.
FFAs are one of the cargo derivatives . The FFA is used on the main trade routes of the tanker and bulk goods industry. FFAs are bilateral Over The Counter ( OTC ) agreements between traders / clients (principal-to-principal basis) and as such are flexible in their design, but not traded on the stock exchange.
An FFA is processed through payment and does not certify any claim to freight capacity or the transport of goods. An FFA regulates:
- the compatible route,
- the day, month and year of settlement,
- the contract size,
- and the contract rate on which the compensation payment is based.
Payment is made within five days of the billing date. The base value of the FFAs is a selected price index that is based on the prices of various routes and ship sizes or types. These indices are published daily by the Baltic Exchange . Offsetting is often done against an average of the index price over several trading days.
concept
The main difference between an FFA and a physical charter is that in the paper trade, there is no possibility or need to move ship or cargo. This results in a flexibility in risk protection that is far greater than was possible when using traditional methods. In any case, the FFA will be settled in monetary terms against the index verified by the Baltic Exchange on the settlement date.
Two parties agree on a price for an FFA for a particular route and thus on a due date in the future. One of the parties acts as the buyer, the other as the seller. If the due date has been reached and the settlement price is higher than the agreed contractual price for the FFA, the seller pays the buyer the difference between the contractual price and the settlement price. If the settlement price is lower than the contract price, the buyer compensates the seller based on this difference.
When trading an individual route, the standard settlement price is calculated from the average of the last seven or ten index days published by the Baltic Exchange in the relevant month. If, however, a period is traded, the average of all index days is used to determine the standard settlement price. By mutual agreement, two contracting parties can also agree on a different basis for determining the settlement price. A good example can be found on the website alstertrader.de.
Freight futures
In addition to the individually changeable, non-exchange-traded freight forwards, there are exchange-traded, (with regard to the route) standardized freight derivatives, the freight futures. These are traded on the International Maritime Exchange (IMAREX) and the New York Mercantile Exchange (NYMEX). The connected clearing houses of the two exchanges act as trading partners in futures trading and thus offer a clearing service for the securities traded. The advantage of the Freight Futures over the Freight Forwards lies in the clearing . This eliminates the trading partner's credit risk. One disadvantage arises from the reduced flexibility of the standardized products. 19 routes are traded on IMAREX and 9 routes (excluding tankers) on NYMEX.
Hybrid FFAs
Hybrid FFAs are freight forwards for which a clearing service is offered by LCH.Clearnet and SGX AsiaClear . The service is offered in order to exclude the credit risk of the trading partner.
OTC Freight Options
Freight options have a selected trading route as the base value and the corresponding average price from previous trading days as the base price. The option works as price insurance. Freight options are structured as Asian options and have monthly, quarterly and annual maturities. The main reason for designing as Asian options is the relative susceptibility of the still immature freight options market to price manipulation.
Market overview
The international market for forward freight agreements is estimated at around 155 billion US dollars . The FFA rates are an estimate of future market prices. However, price uncertainty remains high.
Individual evidence
- ↑ Freight derivatives explained: alstertrader.de , April 1, 2009.
- ^ Financial Times. (Europe), July 18, 2009, p. 21.
- ^ Wolfgang Bessler, Wolfgang Drobetz, Jörg Seidel: Ship Funds as a New Asset Class: An Empirical Analysis of the Relationship between Spot and Forward Prices in Freight Markets . In: Journal of Asset Management . tape 9 , 2008, p. 102-120 , doi : 10.1057 / jam.2008.14 .