Types Forward Freight Agreement
A derivative is an instrument/contract that defines the terms of a transaction that will take place at a later date. The parties buy and/or sell a derivative basis to their expectations of market direction. The terms “buy” and “sell” are obviously short, as participants do not buy or sell physical assets, but buy or sell only a financial contract; a position relative to market management. In shipping, this means that the shipowner and the charterer do not have a real device between them – they will not be obliged to deliver a real ship or load a particular cargo – but they only take a position in the market in the future. Derivatives can be traded on the stock markets or otc. Exchange-traded derivatives are standardized contracts traded in a central place and guaranteed through a clearing house. Over-the-counter trading contracts are negotiated directly between the buyer and seller (or their brokers) and counterparties may be exposed to credit risk because not all trades are settled (but over-the-counter bookings are also being compensated). There are two types of derivatives used in shipping: options are the most advanced derivatives that are increasingly used in shipping lately. This happens because, as we will see later, they offer even more flexibility than common FFA. Unlike futures and futures contracts that impose a bargaining obligation on counterparties, the option allows the buyer to decide whether to do the same and then negotiate. However, the seller of the option has no choice if the buyer chooses to do the same.
Options are also traded on both the stock markets and the CTA. There are two types of options. Call options and selling options. Call options give someone the right to buy an asset at a certain price, while put options give someone the right to sell an asset. For the purchase of an option, you pay the premium, whereas the buyer does not need to write a margin, because he has the opportunity to exercise the same thing and therefore poses no risk to his counterparty. On the other hand, a margin must be made by the seller as collateral. There are 4 main strategies that are often used in options trading: the settlement price (average of 7 days) was finally USD 8,500/day, which is why the FFA seller (owner) pays the difference to the FFA buyer (charterer) for 50 days (500 USD/day – 50 USD – 25,000 USD). Indeed, no party loses money, since the charterer takes back the $500 paid to the owner in the physical market, while the owner pays nothing out of his own pocket, since the $25,000 is part of the total freight he earned (since he earned 8,500/day on the physical market). FFAs, the most common freight derivative, are traded under the terms and conditions of the Forward Freight Agreement Broker Association (FFABA). The main terms of an agreement include the agreed itinerary, the date of the billing, the size of the contract and the rate at which the differences are compensated.