A freight derivative is a financial futures contract between two parties, which sets an agreed future price for carrying commodities at sea. The contract does not involve any actual freight or any actual ships. According Imarex (provider of electronic trading platform, where buyers and sellers of freight and fuel oil derivatives meet), it is purely a financial agreement – much like that found in other commodity futures markets. The undelying is the future levels of freight rates, for dry bulk carriers and tankers.
These instruments are settled against various freight rate indices published by the Baltic Exchange and Platt’s. The bulk of the contracts are traded over–the–counter. A number of clearing houses support this business including NOS (Norwegian), LCH.Clearnet, NYMEX Clearport, SGX (Singapore). Freight derivatives are primarily used by shipowners and operators, oil companies, trading companies and grain houses as tools for managing freight rate risk. (souces: wikipedia.org)
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. Settlement is effected against a relevant route assessment, usually one published by the Baltic Exchange. The global commodity derivatives markets are experiencing massive growth, especially within shipping, oil and energy. Freight derivatives trade on technologically advanced systems, brokerage and settlement plateforms particularly in specialized exchanges in Nordic Countries and Singapore. The products and services offered include, professional broking and clearing of maritime, energy and food related commodity derivatives.
Forward Freight Agreements (FFAs) are ’over the counter’ products made on a "principal–to–principal’ basis. As such, they are flexible and not traded on any exchange. Contracts traded will normally be based on the terms and conditions of the Forward Freight Agreement Brokers Association (FFABA) standard contracts amended as agreed between the principals. The main terms of an agreement cover:
• The agreed route.
• The day, month and year of settlement.
• Contract quantity.
• The contract rate at which differences will be settled.
Settlement is between counter parties in cash within five days following the settlement date. Commissions will be agreed between principal and broker. The broker, acting as intermediary only, is not responsible for the performance of the contract.