The major derivative product is a future contract known as the Freight Forward Agreement (FFA). A FFA is a freight future contract where a buyer and a seller are engaged at a specified price for a specific route and vessel. Two facts define its particularities. First of all, both parts do not have any obligation to operate in the physical market, second one consisting to the total freedom of contract specifications: vessels, duration… The final payment corresponds to the difference between the official price and the specified price. two ways of interest can then be defined for investors:
1. Speculation opportunity:
Act as a shipowner or a charterer without any vessel.
2. Hedging Need:
Shipowners and Charterers need hedging due to high physical volatility rates (greater than 50%).
In summary, the key of this market is to offer same earnings as physical market but without any risk related to seaworthy. The creation of these derivatives has been highly successful and has reached a size of USD $ 6bn in 2003, USD $ 20bn in 2004 and by a forecast of HSBC Shipping Services, it could grow to USD $ 30bn in 2005. At the moment, three sectors have been identified bulk, tanker and second hand vessels.
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