Freight Futures Markets

Forward Freight Agreements or FFAs are futures contracts that allow shipping industry participants to trade in future level of freight rates. Freight is a physical commodity that, unlike others, cannot be stored. Therefore, the traditional arbitrage free model cannot be used for freight futures pricing. The pricing method used relies exclusively on the expectation of what the spot (underlying) freight price will be during the time of the settlement and, subsequently, the supply and demand for a contract at a specific price. This chapter aims to give an overview of the development of the freight futures market and describe pricing and trading strategies for hedging freight exposure both from the ship-owners' and shippers perspective. Given the limited history and depth of the container and tanker freight derivatives market, the focus of this chapter is primarily on the dry bulk futures.