Freight derivatives provide a means of hedging exposure to freight market risk through the trading of specified time charter and voyage rates for forward positions.
FFAs are built on an index composed of a shipping route for tanker or a basket of routes for dry bulk, contracts are traded ‘over the counter’ on a principal-to-principal basis and can be cleared through a clearing house.
What do they mean by "specified time charter" and "voyage rates"?
I know what a time charter and voyage charter are, but how does one trade a "specified time charter"? Are they saying that there is a stock market for time charters, which are traded? But time charters are created by oil field companies who need to move oil. So are they saying that oil companies sell their contracts for 10 years, 15 years, 7 years on the market? And that shipping firms can buy those charters? So, a shipping fleet owner can buy an FFA whilst delivering oil and seamlessly move from contract to contract by twiddling his ships engine speed instead of waking up one morning after delivering his oil and finding that there is no charter available?
In which case you would need to specify the route through which the goods would be moved (Dubai-Cape-NY, Dubai-Suez-NY), so what does he mean by index of routes and principal-to-principal basis?
How can you build an index based on shipping routes - what is the significance of that? Indexes are traditionally built based on companies: e.g. S&P Index is a basket of companies whose price varies. But here you need a basket of FFA contracts from different oil firms (Shell, BP), 5 year Shell FFA's, 10 year shell FFA's. Where do routes enter the picture? Let the tanker any route he feels like.