The settlement price (7 days average) 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 per day – $50-$25,000). 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). Consumer credit contracts are commodity derivatives resulting from the underlying physical shipping markets. In a volatile market, FFA companies provide the opportunity to manage their freight risk. They also provide a mechanism for companies to take price risks by engaging in world trade and are an important part of shipping markets. The instruments are billed using various freight price indices published by the Baltic Exchange and the Shanghai Shipping Exchange. On the other hand, compensation contracts are awarded daily through the clearing house provided for this purpose. 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 provided by leading exchanges such as nasdaQ OMX Commodities, the European Energy Exchange and the Chicago Mercantile Exchange (CME), to name a few. A shipowner uses the index to monitor freight rates and protect them from lower freight rates. Charters use them to reduce the risk of higher freight rates. The Baltic Dry Index is considered a leading indicator of economic activity, as an increase in dry basic shipping indicates an increase in raw material production that stimulates growth. Options are the most advanced derivatives that are increasingly being 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: as maritime markets are riskier, freight derivatives have become a viable method for shipowners and operators, oil companies, trading companies and grain companies to manage freight interest risk. At this point, we look at an example of how this works: in February 2016, a trader buys three shipments of NOPAC grain in Japan, which will be transported when the grain season begins: one shipment in August, one in September and one in October. The distributor is concerned that the shipping market will rise in August and wants to secure its freight against such a potential increase.
On the other hand, a Panamax shipowner, who fixed his ship when the charter opened in mid-July in the Far East, fears that the market will loosen again, and that is why he wants to sell an FFA. The owner and charterer negotiate and set in August 8,000 USD/day for a duration of 50 days (estimated duration of the trip) and the billing price based on BPI-Route 3a (the Trans-Pacific route for Panamax-Bulker s) as an average of the last 7 indices published in August 2016.