FIS is one of the leading providers of freight risk management globally. Our brokers work closely with clients to provide effective hedging and trading opportunities across the most liquid freight contracts.
Forward Freight Agreements (FFAs) offer shipowners, charterers and traders a means of protecting themselves against the inherent volatility in the charter market.
Changes in the freight market, including the increased use of index pricing reflecting higher volatility in freight rates have made the use of freight derivatives more important than ever. Current market conditions and a focus on cost saving only heighten the need for effective risk management strategies.
Trading FFAs entails taking a position in a futures (paper) market as a substitute for a forward cash (physical) transaction. Contracts will normally be based on the terms and conditions of the Forward Freight Agreement Brokers Association and the International Swaps and Derivatives Association.
Some 85% of the dry FFA market is traded on the Baltic Exchange’s Capesize, Panamax, Supramax and Handysize Time Charter average indices, with 15% traded on the individual routes.
Freight derivatives offer a number of advantages to owners, charterers and traders.
- FFAs are easy to fix and close out which allows profit-taking and better cash management;
- FFA forward curves are a good indication of future price direction. Freight rates can be guaranteed for up to three years ahead;
- FFA positions can be bought or sold prior to expiry, with no physical performance and no re-negotiations from counterparties;
- The FFA market is 99% cleared which provides participants with protection against counterparty default risk.
Capesize FFAs are the segment within the freight derivative family of products that provide arguably the best indicator of overall market direction.
In terms of the routes traded and port flexibility, this vessel size is the most limited, yet the iron ore, steam and coking coal cargoes carried are the drivers for the underlying physical market.
Increasingly, Capesize FFAs offer considerable liquidity in the short and medium term and also progressively offer strategies for longer term trading/hedging opportunities, often up to two to three years forward.
The most liquid trading is found in the average of the 4 Time Charter Routes in a combination of days and quarters. Of the individual routes, C3 and C5 iron ore routes are of increasing interest to raw materials producers and consumers as well as to commodity traders.
The Handysize is the smallest but most common vessel in the dry bulk sector. Trading in this category was originally on a trial basis but due to a growing demand it became fully active in 2007.
Handysize FFAs provide good hedging opportunities for participants in shipping of minor bulk commodities.
With the amount of physical opportunities potentially available in Handysize, there is potential for a much more sophisticated and liquid marketplace. As with Supramaxes, the average of the time charter routes is the most widely-traded instrument.
Panamax FFAs are the most widely traded product within the freight derivatives marketplace.
Given the consistent increase in the number of companies that are using Panamax freight derivatives, this segment of the business offers encouraging opportunities for its participants – principally Panamax owners and charterers, grain houses, coal traders, iron ore and steel suppliers and financial institutions.
The product also boasts widespread geographic coverage, with bid/offer prices readily available on the Pacific Round, Atlantic Round, Continent/Far East and Four Time Charter Routes. Consequently, over the recent past the market has seen a rise in paper traders who utilise the market’s liquidity to control freight market exposure.
Supramax derivatives provide a consistently effective mechanism for major and minor bulk shipping market participants to manage and control their exposure to the prevailing volatility in freight rates in smaller vessel classes.
An upsurge in trading activity has also given clear direction to owners and charterers looking to take advantage of the paper market to hedge their long-term earnings in addition to providing options for short and medium-term price cover.