Major Risk Components
Defined as the risk associated with the default on a clients loan obligation before maturity
of an agreement
Defined as the risk associated with the potential loss due to operational failures through
inadequate systems, management failure and fraud
Defined as the risk that reduces the valuation of a company’s position based on changes in
financial prices or rates
Use Noble’s credit team to check counter-parties.
Defaults by Korea Line, Deiulemar, Bottiglieri, Sanko, Daiichi and now Panocean.
Vessels being arrested – delayed arrival of cargo in volatile markets.
Non-performance of shipments.
Fast turnaround in ports.
Port Captaincy services – stowage, draft surveys, etc.
Web based vessel monitoring system.
Efficient cash-flow management and finalization of accounts.
Dedicated team of experienced Master Mariners at charterers service.
Risk is embedded in any forward contract
Future markets are becoming tricky to forecast.
Valuation of forward contacts fluctuate with market changes.
Can be detrimental to company’s profit.
Market risk can be managed by hedging.
Risk Management is
Factors Affecting Freight Market
World economic growth (GDP)
Energy demand/oil prices
Interest rates: trade and investments
Fleet supply: deliveries vs. scrapping
Sources of cargo supply (ton-miles)
Supply disruptions: war, natural calamities, weather
Sentiment: paper market
World Steel Production – up to 2002…
World Steel Production - Present
World Coal & Ore Trade – up to 2002…
World Coal & Ore Trade - Present
Iron Ore Exports/Imports – up to 2002…
Australian iron ore exports
Japanese iron ore imports
Total World Seaborne Iron Ore - Present
What are Freight Derivatives
A Future is an agreement to buy or sell a standard quantity of a specified good for delivery
at a fixed future date at a price agreed today.
Forwards or swaps are principal to principal contracts, where one counterparty takes the
view that the price of a product, at an agreed time, will be higher than the agreed level.
While the other party contracts to differ. In time, the final settlement price provides the
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.
Freight derivatives are primarily used by shipowners and operators, oil companies, trading
companies, and grain houses as tools for managing freight rate risk. Recently, with
commodities standing at the forefront of international economics, the large financial
trading houses, including banks and hedge funds, have entered the market.
Settlement is effected against a relevant route assessment, usually one published by the
Why Trade FFAs?
Ease of trade
Can build up a book
Arbitrage with physical
Forward Freight Agreements (FFAs) are the most common form of freight derivatives
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.
Commissions are agreed between principal and broker. The broker, acting as intermediary
only, is not responsible for the performance of the contract.
The Trading Process
The main terms of an agreement cover:
1. The agreed route.
2. The day, month and year of settlement.
3. Contract size.
4. The contract rate at which differences will be settled.
A nightly report is sent to clients detailing the indicative bid/offer spreads on the major
routes in each of the sectors.
Throughout the day, bids and offers are conveyed by phone, instant messenger and email
in what has become a very fast moving market.
Baltic Exchange publishes “Baltic Forward Assessments (BFA)” - an estimated mid price of
bids and offers for the dry and wet market based on submissions from brokers at 1730
(London), which the official price used for daily margining and book management
Prices reported include:
1. BFA Capesize: C3, C4, C5, C7, C8_03, C9_03, BCI T/C Average
2. BFA Panamax: P1A, P2A, P3A, BPI T/C Average
3. BFA Supramax: BSI T/C Average
4. BFA Handysize: BHSI T/C Average
Once a trade has been concluded, a telephone call (lines are customarily recorded) or
Instant message confirms the basic details of the trade and a recap is subsequently sent to
A full contract is subsequently sent to both parties for signature.
Cleared contracts are margined on a daily basis through the designated clearinghouses
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), The Norwegian
Futures and Options Clearinghouse (NOS) and the Singapore Exchange (SGX)
Counterparty risk exists!
Eliminates counterparty risk!
Why is the Clearing House Taking the Risk? 38
Protected by margins
Margins are related to amount of risk
Mark to market
Problem for pure hedgers
Above all: if you can not pay the margins, you shouldn’t be trading!
Baltic Cape Index 4TC Average
FFA Open Interest
Dealing with a Short Position WITHOUT
COA with Owner (contract of afreightment)
Flexibility of source / destination / size
Ship is always at the wrong time in wrong place
Take in spot tonnage
Dealing with a Short Position WITH
Agree the period
Agree to counterparty / clearing house
Deal is done!!
Backwardation - Where the price for the nearby period is higher than the further
Contango - Where the price for the nearby period is lower than the further forward
Mark to Market - To re-value positions using current market prices to determine
Support - The price buyers are likely to start buying in a falling market.
Resistance - The price sellers are likely to start selling in a rising market.
Basis risk - The differences between the paper hedge and the underlying physical.
Fibonacci - Italian mathematician who discovered his golden sequence of numbers which
can be applied to charts to determine market trends (38.2,50,61.8,100).
Risks Associated with FFAs
Liquidity – this is the biggest problem.
Counter-party – all trades cleared.
Basis risk – we need to be aware of it (route, size, laycan, special conditions…..)
Accuracy of indices – manipulation.