The Baltic Exchange in London presents the Baltic Dry Daily Index as a market barometer and a leading indicator of the maritime sector. It offers investors insight into the price of offshoring important commodities by sea, but also contributes to the pricing of freight derivatives. The index includes 20 navigation routes measured from time maps and covers different bulk carriers of different sizes, including Handysize, Supramax, Panamax and Capesize. Freight derivatives are financial instruments whose value is derived from future freight rates, such as.B. Dry bulk transport rates and tanker rates. Cargo derivatives are often used by end-users (ship owners and grain houses) and suppliers (integrated oil companies and international trading companies) to reduce risk and guard against price fluctuations in the supply chain. However, as with any derivative, market speculators – such as hedge funds and retailers – are involved in both buying and selling freight contracts that offer a new, more liquid marketplace. Freight derivatives include exchange-traded futures, swap futures, preferential freight agreements (BSAs), container freight swaps, container freight derivatives and physical freight derivatives. FFAs, the most common freight derivative, are traded outside the terms of the Forward Freight Agreement Broker Association`s (FFABA) standard contracts. The main terms of an agreement include the agreed route, the settlement date, the size of the contract and the rate of compensation for differences. The instruments are billed with various freight rate indices published by the Baltic Exchange and the Shanghai Shipping Exchange. On the other hand, cleared contracts are daily through the designated clearing house. At the end of each day, investors receive or owe the difference between the price of paper contracts and the market index.
Clearing services are offered by leading exchanges, including nasdaq OMX Commodities, the European Energy Exchange and the Chicago Mercantile Exchange (CME), to name a few. A shipowner uses the index to monitor and protect a drop in freight rates. On the other hand, charters use it to reduce the risk of increased freight rates. The Baltic Dry Index is considered a leading indicator of economic activity, as an increase in bulk shipping indicates an increase in high-growth raw materials. As maritime markets present another risk, cargo derivatives have become a viable method for shipowners and operators, oil companies, commercial enterprises and grain houses to manage freight rate risk. If the agreed price is lower than the invoice price, the buyer pays the difference to the seller. The difference in billing and contract price is then multiplied by the size of the load or the duration of the trip. HABITATS were developed in the early 1990s for navigation.
FFAs are traded both over-the-counter (OTC) and exchange-traded. Trades are often unprecedented and are made solely on trust. The contract expires on the date of performance and if the agreed price is higher than the invoice price, the seller pays the difference to the buyer of the contract. . . .