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Forward Freight Agreements

Forward Freight Agreements. A brief introductory presentation by Professor Alkis John Corres. Definition of FFAs.

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Forward Freight Agreements

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  1. Forward Freight Agreements A brief introductory presentation by Professor Alkis John Corres

  2. Definition of FFAs • Forward Freight Agreements (FFAs) are primarily transacted on a cleared basis and will normally be based on the terms and conditions of the FFABA standard contracts as adapted by the various clearing houses.The main terms of an agreement cover: (a) The agreed route.(b) The day, month and year of      settlement.(c) Contract size. (d) The contract rate at which     differences will be settled. • Commissions are agreed between principal and broker. • The broker, acting as intermediary only, is not responsible for the performance of the contract.

  3. The basics of FFAs • 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.

  4. Cleared contracts • Cleared contracts are margined on a daily basis through the designated clearing houses and margins are based on a close-of-play forward assessment published by the Baltic Exchange. • At the end of each day, traders pay or receive the difference between the price of the paper contract and the market index.Clearing services are provided by : • the London Clearing House (LCH), • NASDAQ OMX Commodities (NDAQ), • the Singapore Exchange (SGX) and the • Chicago Mercantile Exchange (CME).

  5. Baltic Forward Assessments (BFAs) The BFA is a benchmark assessment, published on a daily basis intended for mark to market purposes. Example Baltic Exchange Forward Assessment for Panamax Routes covered:P1a - 74,000 dwt Transatlantic RV - Entire Month Settlement BasisP2a – 74,000 dwt Cont Trip Far East - Entire Month Settlement BasisP3a – 74,000 dwt trans Pacific round voyage - Entire Month Settlement BasisTimecharter average - Entire Month Settlement Basis BFA Panamax is based on the average of assessments made by a panel of FFA brokers.

  6. Types of FFAs There are two categories of freight derivatives. • One is privately-negotiated derivatives known as “over the counter” (“OTC”) derivatives or “swaps”. • The other is standardized, exchange-traded derivatives known as “futures” or cleared contracts. • One of the major differences between swaps and futures is the assumption of counterparty risk; that is, • with OTC derivatives the risk of default by either party to the FFA is assumed by the other party to the agreement (the “counterparty”), • whereas with exchange-traded derivatives the risk of default by either of the parties is assumed by a clearing house, and the parties to the agreement only assume exposure to default by the clearing house.

  7. Representative types of player in the derivatives’ markets • Parties seeking to hedge a price risk, i.e. to transfer it to another party which can either be another hedger with an opposite position, or a speculator. • Parties seeking to speculate in a similar exchange environment as above, given that an FFA agreement can be anonymous, and • Parties seeking gains from arbitrage i.e. to take advantage of temporary price differences of the same good in different markets (due to time lags and/or other imbalances).

  8. Exposure to risk from entry in the futures markets. • Losses of banks and other major players have amounted to billions in the recent past. • Full and complete understanding by the players is of the utmost importance when not involving professionals. • Over The Counter deals may appear less cumbersome but involve credit risks which are covered in the case of exchange-traded derivatives. END

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