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Re: http://www.balticexchange.com/default.asp?action=article&ID=35

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.

and re: http://en.wikipedia.org/wiki/Forward_freight_agreement

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.

  • I'm not satisfied with the answer so i'll try and add to it once I have a better understanding – user10542 Jul 6 '13 at 3:56
  • Best book on the subject would be Shipping Derivatives and Risk Management – user25693 Feb 18 '15 at 13:29
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The product descriptions for FFA swaps and options can be found here: http://www.lchclearnet.com/freight/ffas/products.asp

The index (e.g. the BFA) is based on the settlement prices of the P2, P2A, and C4 contracts and the panamax TC routes. As such it's just a performance index and replicates the returns you'd get from holding a portfolio of the constituents.

I think from the clearing descriptions everything should be clear. The wording in the link on the Baltic Exchange website is a bit nebulous. I think they mean standardised instead of specified. Because that's what sets the FFABA apart from OTC agreements or OTC spot markets.

Edit:
For more information on financial instruments in general see the Handbook of Financial Instuments. I haven't got the latest edition but I doubt he will mention FFAs, CFSAs, or anything that's specific to maritime markets but after all they're just plain forward agreements over a not-so-common underlying.

  • Hi, that opened up even more questions - I'm a newbie to finance - a student, not a trader and I don't work in the financial sector. Could you suggest a reading resource to explain: Minimum tick, Fixed price, Floating price, Contract series, Transatlantic RV (that looks like a name for a shipping route) – user10542 Jul 5 '13 at 7:22
  • I started with a book on shipping called: Maritime Economics and didn't understand words and started googleing so.. i have difficulty understanding a swap(well.. that's easy enough.. you xchange coupons, but you have so many different types..) Could you suggest a reading resource, book - that could get me upto scratch reasonably quickly – user10542 Jul 5 '13 at 7:26
  • Specifically: the minimum tick is the smallest change in quotes allowed, i.e. with a mintick of $0.0001 you can't change a quote from $2.0100 to $2.01005 but only to $2.0101 – hroptatyr Jul 5 '13 at 7:27
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    I think, it's too much to explain in a series of comments here. Unfortunately, I don't have any resources handy that explain all that in just one book, I guess it's the years of experience in the financial sector that make it easy to grasp new contracts types (FFAs are relatively new, around for just 10 years or so). – hroptatyr Jul 5 '13 at 7:31
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    I edited the post to include a pointer to a rather general (but good) introduction to financial instruments. – hroptatyr Jul 5 '13 at 7:46
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To answer this part of the question:

"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."

No, you don't get a basket of FFA contracts from given companies (such as Shell and BP). What you get are rates assessed by a panel of brokers for the main tanker routes (especially in the tanker market, there are comparatively few standard routes, because the major oil loading areas are also comparatively few). The panel will assess the spot and future markets on a daily basis, and issue the rates accordingly.

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