Forward Freight Agreement (FFA) is a derivative contract traded on the Singapore Exchange (SGX). It is used by shippers, charterers, and ship owners to mitigate risks associated with freight rates. The FFA contract allows participants to hedge against price fluctuations in freight rates for future voyages. In this article, we will explore the concept of FFA and how it works on SGX.
What is a Forward Freight Agreement?
FFA is a financial instrument that enables market participants to lock in a price for the future delivery of a certain quantity of freight. It is a futures contract that allows buyers and sellers to hedge against the volatility of freight rates. The FFA contract is similar to other financial derivatives like options and futures, in that it provides a mechanism for price discovery and risk management.
The SGX is one of the leading exchanges for FFA trading. SGX`s FFA contracts are based on the Baltic Exchange Freight Index (BFI). The index tracks the prices for various types of shipping vessels and routes worldwide. The BFI is a reliable indicator of the global freight market`s sentiments and is used to settle the SGX FFA contracts.
How does FFA work on SGX?
FFA contracts on SGX are traded electronically through a platform called the SGX Titan. The trading hours for FFA contracts are from 9 am to 11:30 pm Singapore time, Monday to Friday. The SGX offers contracts for various types of vessels, including Supramax, Panamax, and Capesize. The contracts have a standardized size and expiration date.
The FFA contract`s price is determined by the movement of the BFI index. For example, if the BFI index is trading at 1000 points and a buyer enters into an FFA contract for 1000 tonnes of Supramax for a period of 30 days, the contract price will be 1000 x $1 = $1000. If the BFI index goes up to 1100 points during the contract period, the buyer can sell the contract at a profit of $100 (1100 – 1000) x $1 = $100.
Advantages of FFA
FFA contracts provide several advantages to market participants, primarily for risk management. Shippers, charterers, and ship owners use FFA contracts to hedge against the uncertainties of the freight market. By locking in a price for future delivery, they can reduce their exposure to price volatility and ensure a predictable income stream.
FFA contracts also provide liquidity to the freight market. The contracts facilitate price discovery and provide a mechanism for hedging and speculation. Liquidity in the market enables market participants to enter and exit positions quickly and efficiently, thereby promoting market efficiency.
The FFA market on the SGX provides market participants with a valuable tool for risk management and price discovery in the freight market. By allowing market participants to hedge against market volatility with standardized futures contracts, FFA contracts provide liquidity and promote market efficiency. As the global freight market continues to evolve, the FFA market is likely to become an increasingly important part of the industry.